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                                PROXY STATEMENT
        PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Filed by the Registrant
 
Filed by a Party other than the Registrant [ ]
 
Check the appropriate box:
 
                                            
[X]  Preliminary Proxy Statement               [X]  Confidential, for Use of the Commission
                                                    Only (as permitted by Rule 14a-6(e)(2))
[ ]  Definitive Proxy Statement
[ ]  Definitive Additional Materials
[ ]  Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
PIONEER NATURAL RESOURCES COMPANY - -------------------------------------------------------------------------------- (Name of Registrant as Specified in its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ ] No fee required. [X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
==================================================================================================================== AGGREGATE MAXIMUM NUMBER OF PER UNIT AGGREGATE TOTAL FEE TITLE OF EACH CLASS OF SECURITIES SECURITIES PRICE(1) VALUE PAID - -------------------------------------------------------------------------------------------------------------------- Common Shares.................... 51,332,432(2) $21.26 $1,091,327,504 $218,266 ==================================================================================================================
(1) Represents C$29.43 (the average of the high and low sales price of Chauvco Common Shares on The Toronto Stock Exchange on September 25, 1997), converted to U.S. dollars by applying the Noon Spot Rate on September 25, 1995 of .7224 Canadian dollar for each U.S. dollar. (2) Assumes exercise of all outstanding options. [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: ================================================================================ 2 PRELIMINARY COPIES PIONEER NATURAL RESOURCES COMPANY AND CHAUVCO RESOURCES LTD. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF PIONEER NATURAL RESOURCES COMPANY AND NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF CHAUVCO RESOURCES LTD. TO BE HELD DECEMBER , 1997 AND NOTICE OF PETITION AND JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT WITH RESPECT TO AN ARRANGEMENT INVOLVING PIONEER NATURAL RESOURCES COMPANY AND CHAUVCO RESOURCES LTD. NOVEMBER , 1997 3 PIONEER NATURAL RESOURCES COMPANY 1400 Williams Square West 5205 N. O'Connor Blvd. Irving, Texas 75039 November , 1997 Dear Pioneer Stockholder: You are cordially invited to attend a special meeting of stockholders (the "Special Meeting") of Pioneer Natural Resources Company, a Delaware corporation ("Pioneer"), to be held on , 1997 at , at . The Special Meeting relates to the acquisition by Pioneer of the Canadian and Argentine oil and gas businesses of Chauvco Resources Ltd., an Alberta corporation ("Chauvco"), and the spinoff to Chauvco shareholders and optionholders of Chauvco's Gabonese oil and gas operations and other international interests. These transactions will be accomplished pursuant to the terms of a Combination Agreement (the "Combination Agreement") dated September 3, 1997 between Pioneer and Chauvco. The Combination Agreement provides for a plan of arrangement (the "Plan of Arrangement"), whereby, without limitation, Pioneer will issue common stock, par value $0.01 per share, of Pioneer ("Pioneer Common Stock") and from time to time thereafter upon the exchange of exchangeable shares ("Exchangeable Shares") of Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada"), a newly-formed, indirectly owned subsidiary of Pioneer in consideration for all of the issued and outstanding shares and options of Chauvco (the transactions contemplated by the Combination Agreement and the Plan of Arrangement being referred to herein collectively as the "Transaction"). At the Special Meeting, you will be asked to approve the Combination Agreement and the Transaction. Details of the Transaction are contained in the Joint Management Information Circular and Proxy Statement (the "Joint Proxy Statement") being delivered with this letter. If the proposals contained in the Joint Proxy Statement are approved by Pioneer's stockholders and Chauvco's shareholders, Chauvco will become a wholly-owned subsidiary of Pioneer Canada, and each existing holder of common shares of Chauvco ("Chauvco Common Shares") will automatically transfer each Chauvco Common Share such holder holds to Pioneer Canada in consideration for (i) a fraction (varying between 0.493827 and 0.451467 as detailed in the Joint Proxy Statement) of a share of Pioneer Common Stock or Exchangeable Shares, or a combination of both, in each case determined in accordance with the Exchange Ratio (as defined in the Joint Proxy Statement) and as otherwise set forth in the Joint Proxy Statement, and, in certain cases, based upon such holder's election, and (ii) one share of the common shares of Chauvco Resources International Ltd. ("CRI Share"), which will have its principal properties, operations and oil reserves located in Gabon, central west Africa. In certain circumstances, Pioneer has the right to cause Pioneer Canada to deliver fewer shares of Pioneer Common Stock and Exchangeable Shares and pay cash to the holders of Chauvco Common Shares, as detailed in the Joint Proxy Statement. In addition, each existing holder of options to purchase Chauvco Common Shares ("Chauvco Options") will automatically transfer each Chauvco Option such holder holds to Pioneer Canada in consideration for (i) one CRI Share and (ii) a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio and in accordance with the holder's election of whether or not to pay the exercise price in cash. Each Exchangeable Share will entitle its holder to dividend and other rights economically equivalent to those of the Pioneer Common Stock and, through a voting trust, the right to vote at meetings of the stockholders of Pioneer. THE PIONEER BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE COMBINATION AGREEMENT AND THE TRANSACTION ARE FAIR TO AND IN THE BEST INTERESTS OF PIONEER AND ITS STOCKHOLDERS, HAS APPROVED THE COMBINATION AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT PIONEER'S STOCKHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE COMBINATION AGREEMENT AND THE TRANSACTION. In view of the importance of the actions to be taken at the Special Meeting, you are urged to read the Joint Proxy Statement carefully and, regardless of the number of shares that you own, we request that you 4 complete, sign, date and return the enclosed proxy card promptly. If you attend the Special Meeting, you may vote in person, even though you have previously returned your proxy. Sincerely, I. Jon Brumley Chairman of the Board 5 PIONEER NATURAL RESOURCES COMPANY 1400 Williams Square West 5205 N. O'Connor Blvd. Irving, Texas 75039 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS To Be Held November , 1997 Notice is hereby given that a special meeting (the "Special Meeting") of the stockholders of Pioneer Natural Resources Company, a Delaware corporation ("Pioneer"), will be held at , on December , 1997 at for the following purposes: 1. To consider and vote upon a proposal to approve the Combination Agreement dated September 3, 1997 (the "Combination Agreement") between Pioneer and Chauvco Resources Ltd., an Alberta corporation ("Chauvco"), and the transactions contemplated thereby and by a plan of arrangement attached as an exhibit to the Combination Agreement (the "Plan of Arrangement"), which transactions include, without limitation, the issuance of shares of common stock, par value $0.01 per share, upon consummation of the arrangement set forth in the Plan of Arrangement (the "Arrangement") and from time to time thereafter upon the exchange of exchangeable shares of Pioneer Natural Resources (Canada) Ltd., a newly-formed, indirectly owned subsidiary of Pioneer, being issued pursuant to the Arrangement, as more fully described in the accompanying Joint Management Information Circular and Proxy Statement; and 2. To transact such other business as may properly be presented to the Special Meeting. A record of stockholders has been taken as of the close of business on November , 1997, and only those stockholders of record on that date will be entitled to notice of and to vote at the Special Meeting. A stockholders list will be available commencing December , 1997 and may be inspected during normal business hours prior to the Special Meeting at the offices of Pioneer, 1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039. If you do not expect to be present at the Special Meeting, please sign and date the enclosed proxy and return it promptly in the enclosed stamped envelope that has been provided for your convenience. The prompt return of proxies will help ensure a quorum and save Pioneer the expense of further solicitation. By Order of the Board of Directors, Mark L. Withrow Secretary November , 1997 6 CHAUVCO RESOURCES LTD. 2900, 255 -- 5th Avenue S.W. Calgary, Alberta, Canada T2P 3G6 November , 1997 Dear Chauvco shareholder: We are pleased to invite you to attend an important meeting of shareholders (the "Meeting"), to be held on , December , 1997 at a.m. (Calgary time) at , Calgary, Alberta, Canada. Because of the importance of the business of the Meeting, we would like as many of you as possible either to attend in person, or to be represented by sending in your proxies. The business of the Meeting relates to the acquisition by Pioneer Natural Resources Company ("Pioneer") of the Canadian and Argentine oil and gas businesses of Chauvco Resources Ltd. ("Chauvco") and the spinoff to Chauvco shareholders and optionholders of Chauvco's Gabonese oil and gas operations and other international interests. Approval of these transactions requires consideration of and voting on an arrangement (the "Arrangement") which, if approved, will facilitate the business combination of Chauvco and Pioneer. The details of the proposed transaction are included in the attached Joint Management Information Circular and Proxy Statement (the "Joint Proxy Statement"). Also included is the form of proxy and Letter of Transmittal and Election Form. Please review the Joint Proxy Statement carefully as it has been prepared to help you make an informed decision. If the proposals contained in the Joint Proxy Statement are approved by Pioneer's stockholders and Chauvco's shareholders, Chauvco will become a wholly-owned subsidiary of Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada"), and each existing holder of common shares of Chauvco ("Chauvco Common Shares") will automatically transfer each Chauvco Common Share such holder holds to Pioneer Canada in consideration for: (i) a fraction (varying between 0.493827 and 0.451467 as detailed in the Joint Proxy Statement) of Pioneer common stock, ("Pioneer Common Stock"), or exchangeable shares ("Exchangeable Shares") of Pioneer Canada, in each case determined in accordance with the Exchange Ratio (as defined in the Joint Proxy Statement) and as otherwise set forth in the Joint Proxy Statement, and (ii) one share of the common stock of Chauvco Resources International Ltd. ("CRI Share"), which will have its principal properties, operations and oil reserves located in Gabon, central west Africa. Only holders resident in Canada may elect to receive Exchangeable Shares, and such holders may also elect to have their Chauvco Common Shares transferred for a combination of Pioneer Common Stock and Exchangeable Shares. In certain circumstances, Pioneer has the right to issue fewer shares of Pioneer Common Stock and Exchangeable Shares and pay cash to the holders of Chauvco Common Shares, as detailed in the Joint Proxy Statement. In addition, each existing holder of options to purchase Chauvco Common Shares ("Chauvco Options") will automatically transfer each Chauvco Option such holder holds to Pioneer Canada in consideration for (i) one CRI Share and (ii) a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio and in accordance with the holder's election of whether or not to pay the exercise price in cash. Each Exchangeable Share will entitle its holder to dividend and other rights economically equivalent to those of the Pioneer Common Stock and, through a voting trust, the right to vote at meetings of the stockholders of Pioneer. The Combination Agreement provides that, before the Arrangement becomes effective, Chauvco will enter into a transaction causing its 20% interest in the Alliance Pipeline Project (as defined in the Joint Proxy Statement) to be distributed to or through an entity for a cash payment to Chauvco of C$13.5 million plus any additional amounts funded for regular capital needs and commitments after September 3, 1997. After considering many different factors (which are reviewed in detail in the Joint Proxy Statement) including, among other things, the opinions of Salomon Brothers Inc and RBC Dominion Securities Inc., financial advisors engaged by Chauvco, that the consideration to be received by the Chauvco shareholders in the transaction is fair from a financial point of view, your Board of Directors has unanimously recommended that you vote in favor of the resolution concerning the Arrangement and the combination of Pioneer and Chauvco. We urge you to complete the enclosed form of proxy and return it, not later than the time specified in the Notice of Special Meeting of Shareholders, in the postage-paid envelope provided. Regardless of the number of shares you own, your vote is important. Yours very truly, Guy J. Turcotte Chairman and Chief Executive Officer 7 CHAUVCO RESOURCES LTD. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS --------------------- NOTICE IS HEREBY GIVEN that a special meeting of the shareholders (the "Meeting") of Chauvco Resources Ltd. ("Chauvco") will be held at a.m. (Calgary time) on , December , 1997 at , Calgary, Alberta, Canada for the following purposes: 1. to consider, pursuant to an order (the "Interim Order") of the Court of Queen's Bench of Alberta dated November , 1997 and, if deemed advisable, to pass, with or without variation, a special resolution (the "Arrangement Resolution") to approve an arrangement (the "Arrangement") under section 186 of the Business Corporations Act (Alberta) (the "ABCA"), all as more particularly described in the accompanying Joint Management Information Circular and Proxy Statement (the "Joint Proxy Statement"); and 2. to transact such further or other business as may properly come before the Meeting or any adjournment or adjournments thereof. Specific details of the matters to be put before the Meeting are set out in the Joint Proxy Statement, which forms part of this Notice. The full text of the Arrangement Resolution is attached as Annex B to the Joint Proxy Statement. Pursuant to the Interim Order, a copy of which is attached as Annex D to the Joint Proxy Statement, holders of Chauvco common shares have been granted the right to dissent in respect of the Arrangement. If the Arrangement becomes effective, a dissenting shareholder will be entitled to be paid the fair value of the Chauvco common shares held by such shareholder if the Secretary of Chauvco or the Chairman of the Meeting shall have received from such dissenting shareholder at or before the Meeting a written objection to the Arrangement Resolution and the dissenting holder shall have otherwise complied with the provisions of section 184 of the ABCA. The dissent right is described in the accompanying Joint Proxy Statement and the full text of section 184 of the ABCA is attached as Annex M to the Joint Proxy Statement. ONLY REGISTERED SHAREHOLDERS MAY DISSENT. FAILURE TO STRICTLY COMPLY WITH THE REQUIREMENTS SET OUT IN SECTION 184 OF THE ABCA MAY RESULT IN THE LOSS OF ANY RIGHT OF DISSENT. Each person who is a holder of record of Chauvco common shares at the close of business on , 1997 (the "Chauvco Record Date"), is entitled to notice of, and to attend and vote at, the Meeting and any adjournment or postponement thereof, provided that to the extent a person has transferred any Chauvco common shares after the Chauvco Record Date and the transferee of such shares establishes that such transferee owns such shares and demands not later than 10 days before the Meeting to be included in the list of shareholders eligible to vote at the Meeting, such transferee will be entitled to vote such shares at the Meeting. DATED at Calgary, Alberta, November , 1997. By Order of the Chauvco Board of Directors Martin A. Lambert Secretary SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. TO BE EFFECTIVE, PROXIES MUST BE RECEIVED BY CORPORATE SHAREHOLDER SERVICES INC., SUITE 1485, 550 SIXTH AVENUE S.W., CALGARY, ALBERTA T2P OS2 PRIOR TO THE MEETING OR, IF THE MEETING IS ADJOURNED OR POSTPONED, BEFORE THE TIME OF THE ADJOURNED OR POSTPONED MEETING. 8 ACTION NO. IN THE COURT OF QUEEN'S BENCH OF ALBERTA JUDICIAL DISTRICT OF CALGARY IN THE MATTER OF SECTION 186 OF THE BUSINESS CORPORATIONS ACT, S.A. 1981, c.B-15, AS AMENDED AND IN THE MATTER OF AN ARRANGEMENT PROPOSED BY CHAUVCO RESOURCES LTD. INVOLVING CHAUVCO RESOURCES LTD., ITS SECURITYHOLDERS, PIONEER NATURAL RESOURCES COMPANY AND PIONEER NATURAL RESOURCES (CANADA) LTD. NOTICE OF PETITION NOTICE IS HEREBY GIVEN that a petition (the "Petition") has been filed with the Court of Queen's Bench of Alberta, Judicial District of Calgary (the "Court"), by Chauvco Resources Ltd. ("Chauvco") with respect to a proposed arrangement (the "Arrangement") under Section 186 of the Business Corporations Act, S.A. 1981, c.B-15, as amended (the "ABCA"), involving Chauvco, its securityholders, Pioneer Natural Resources Company ("Pioneer") and Pioneer Natural Resources (Canada) Ltd., which Arrangement is described in greater detail in the Joint Management Information Circular and Proxy Statement of Pioneer and Chauvco dated November , 1997 accompanying this Notice of Petition. AND NOTICE IS FURTHER GIVEN that the said Petition will be heard before the presiding Chambers Justice at the Court House, 611 -- 4th Street S.W., Calgary, Alberta, Canada, on the day of December, 1997 at a.m. (Calgary time) or as soon thereafter as counsel may be heard. At the hearing of the Petition, Chauvco intends to seek the following: (i) a declaration that the terms and conditions of the Arrangement are fair to the persons affected; (ii) an order approving the Arrangement pursuant to the provisions of Section 186 of the ABCA; (iii) a declaration that the Arrangement will, upon the filing of Articles of Arrangement under the ABCA and the issuance of the Certificate of Amendment under the ABCA, be effective under the ABCA in accordance with its terms; and (iv) such other further orders, declarations and directions as the Court may deem just. ANY SHAREHOLDER OF CHAUVCO (A "SHAREHOLDER") OR OTHER INTERESTED PARTY DESIRING TO SUPPORT OR OPPOSE THE PETITION OR MAKE SUBMISSIONS MAY APPEAR AT THE TIME OF HEARING IN PERSON OR BY COUNSEL FOR THAT PURPOSE, PROVIDED SUCH SHAREHOLDER OR OTHER INTERESTED PARTY FILES WITH THE COURT AND SERVES UPON CHAUVCO, ON OR BEFORE DECEMBER , 1997, A NOTICE OF INTENTION TO APPEAR, TOGETHER WITH ANY EVIDENCE OR MATERIALS WHICH ARE TO BE PRESENTED TO THE COURT, SETTING OUT SUCH SHAREHOLDER'S OR INTERESTED PARTY'S ADDRESS FOR SERVICE BY ORDINARY MAIL AND INDICATING WHETHER SUCH SHAREHOLDER OR INTERESTED PARTY INTENDS TO SUPPORT OR OPPOSE THE PETITION OR MAKE SUBMISSIONS. Service on Chauvco is to be effected by delivery to the solicitors for Chauvco at the address set forth below. AND NOTICE IS FURTHER GIVEN that, at the hearing and subject to the foregoing, Shareholders and any other interested party will be entitled to make representations as to, and the Court will be requested to consider, the fairness of the Arrangement. If you do not attend, either in person or by counsel, at that time, the Court may approve or refuse to approve the Arrangement as presented, or may approve it subject to such terms and conditions as the Court shall deem fit, without any further notice. AND NOTICE IS FURTHER GIVEN that the Court, by an Interim Order dated November , 1997 has given directions as to the calling and holding of the Special Meeting of the Shareholders of Chauvco for the purpose of such Shareholders voting upon the special resolution to approve the Arrangement and, in 9 particular, has directed that such Shareholders shall have the right to dissent under the provisions of Section 184 of the ABCA upon compliance with the terms of the Interim Order. AND NOTICE IS FURTHER GIVEN that a copy of the said Petition and other documents in the proceedings will be furnished to any Shareholder of Chauvco or other interested party requesting the same by the undermentioned solicitors for Chauvco upon written request delivered to such solicitors as follows: Bennett Jones Verchere 4500 Bankers Hall East 855 -- Second Street S.W. Calgary, Alberta T2P 4K7 Attention: Martin A. Lambert DATED at the City of Calgary, in the Province of Alberta, this day of November, 1997. CHAUVCO RESOURCES LTD. Guy J. Turcotte Chairman and Chief Executive Officer 10 PIONEER NATURAL RESOURCES COMPANY CHAUVCO RESOURCES LTD. JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT This Joint Management Information Circular and Proxy Statement (the "Joint Proxy Statement") is being furnished to holders of common shares of Chauvco Resources Ltd., an Alberta, Canada corporation ("Chauvco"), in connection with the solicitation of proxies by management of Chauvco for use at the Chauvco Meeting to be held at (Calgary time) on December , 1997, at and any adjournment or postponement thereof. This Joint Proxy Statement is also being furnished to holders of common stock, par value $0.01 per share, of Pioneer Natural Resources Company, a Delaware corporation ("Pioneer"), in connection with the solicitation of proxies by the board of directors of Pioneer for use at the Pioneer Meeting to be held at (Dallas time) on December , 1997 at and any adjournment or postponement thereof. This Joint Proxy Statement and the accompanying forms of proxy are first being mailed to shareholders of Chauvco and stockholders of Pioneer on or about November , 1997. All information in this Joint Proxy Statement relating to Chauvco and Chauvco Resources International Ltd., which will have its properties, operations and oil reserves located in Gabon, central west Africa and other international locations, has been supplied by Chauvco and all information relating to Pioneer, including its predecessors, has been supplied by Pioneer. Certain capitalized terms used in this Joint Proxy Statement without definition have the meanings ascribed thereto in the Glossary of Terms beginning on page 195. SEE "RISK FACTORS" BEGINNING ON PAGE 22 AND ON PAGE A-6 OF ANNEX A FOR CERTAIN CONSIDERATIONS RELEVANT TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT IN THE SECURITIES REFERRED TO HEREIN. --------------------- No person is authorized to give any information or to make any representation not contained in this Joint Proxy Statement and, if given or made, such information or representation should not be relied upon as having been authorized. This Joint Proxy Statement does not constitute an offer to sell, or a solicitation of an offer to purchase, any securities, or the solicitation of a proxy, by any person in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such an offer or solicitation of an offer or proxy solicitation. Neither delivery of this Joint Proxy Statement nor any distribution of the securities referred to in this Joint Proxy Statement shall, under any circumstances, create an implication that there has been no change in the information set forth therein since the date of this Joint Proxy Statement. --------------------- 11 TABLE OF CONTENTS
PAGE ----- SUMMARY..................................................... 5 RISK FACTORS................................................ 22 REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES.............. 28 EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS.................. 28 COMPARATIVE MARKET PRICE DATA............................... 29 COMPARATIVE PER SHARE DATA.................................. 30 THE MEETINGS................................................ 31 Pioneer................................................... 31 Chauvco................................................... 32 THE TRANSACTION............................................. 33 General................................................... 33 Transaction Mechanics and Description of Exchangeable Shares and Other Features.............................. 34 The Combination Agreement................................. 39 Other Agreements.......................................... 43 Court Approval of the Arrangement and Completion of the Transaction............................................ 43 Background of the Transaction............................. 43 Recommendation of Pioneer's Board of Directors; Reasons for the Transaction.................................... 46 Recommendation of Chauvco's Board of Directors; Reasons for the Transaction.................................... 47 Opinions of Financial Advisors............................ 48 Interests of Certain Persons in the Transaction........... 59 Accounting Treatment...................................... 59 Procedures for Exchange by Chauvco Shareholders and Chauvco Optionholders.................................. 59 Stock Exchange Listing.................................... 60 Eligibility for Investment in Canada...................... 61 Regulatory Matters........................................ 61 Resale of Exchangeable Shares, Pioneer Common Stock and CRI Shares Received in the Transaction................. 61 Continuance of Pioneer Canada Under the ABCA.............. 63 Business Combination Costs................................ 63 Dissenters' Rights........................................ 63 INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS AND CHAUVCO OPTIONHOLDERS..................................... 63 Canadian Federal Income Tax Considerations................ 63 United States Federal Income Tax Considerations........... 69 BUSINESS OF PIONEER......................................... 73 General................................................... 73 Overview of the Pioneer Enterprise........................ 73 Management of Pioneer..................................... 75 Compensation of Executive Officers........................ 80 Compensation Committee Interlocks and Insider Participation.......................................... 87 Description of Pioneer Long-Term Incentive Plan........... 88 Description of Pioneer Employee Stock Purchase Plan....... 91 Related Party Transactions................................ 93 Capitalization Table...................................... 95 Selected Historical Consolidated Financial Data of Pioneer................................................ 94 Management's Discussion and Analysis of Financial Condition and Results of Operations of Pioneer......... 97
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PAGE ----- Selected Historical Consolidated Financial Data of Mesa... 113 Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa................................................ 115 Business Description...................................... 126 Governmental Regulation................................... 142 Environmental and Health Controls......................... 142 Employees................................................. 145 Litigation................................................ 145 BUSINESS OF CHAUVCO......................................... 147 General................................................... 147 Management of Chauvco..................................... 148 Executive Compensation.................................... 150 Employee Stock Option Plan................................ 151 Long Term Incentive Plans................................. 151 Composition of the Compensation Committee................. 152 Report on Executive Compensation.......................... 152 Directors' Compensation................................... 153 Capitalization............................................ 153 Principal Holders......................................... 153 Selected Historical Consolidated Financial Data of Chauvco................................................ 154 Management's Discussion and Analysis of Financial Condition and Results of Operations of Chauvco......... 155 Petroleum and Natural Gas Operations...................... 162 Governmental and Environmental Regulations................ 173 Employees................................................. 176 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 177 COMPARISON OF STOCKHOLDER RIGHTS............................ 178 Vote Required for Extraordinary Transactions.............. 178 Amendment to Governing Documents.......................... 179 Dissenter's Rights........................................ 179 Oppression Remedy......................................... 180 Derivative Action......................................... 180 Shareholder Consent in Lieu of Meeting.................... 181 Director Qualifications................................... 181 Fiduciary Duties of Directors............................. 181 Indemnification of Officers and Directors................. 181 Director Liability........................................ 182 Anti-Takeover Provisions and Interested Stockholder Transactions........................................... 182 DESCRIPTION OF CAPITAL STOCK................................ 184 Pioneer Capital Stock..................................... 184 Chauvco Share Capital..................................... 186 Pioneer Canada Share Capital.............................. 186 Support Agreement......................................... 188 Voting and Exchange Trust Agreement....................... 189 Delivery of Pioneer Common Stock.......................... 190 Call Rights............................................... 190 DISSENTING SHAREHOLDERS' RIGHTS............................. 191 LEGAL MATTERS............................................... 193 EXPERTS..................................................... 193
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PAGE ----- AVAILABLE INFORMATION FOR PIONEER........................... 194 STOCKHOLDER PROPOSALS....................................... 194 APPROVAL OF PROXY STATEMENT BY CHAUVCO BOARD OF DIRECTORS... 194 GLOSSARY OF TERMS........................................... 195 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1 ANNEX A -- Chauvco Resources International Ltd. Information............................................... A-1 ANNEX B -- Form of Arrangement Resolution.................. B-1 ANNEX C -- Combination Agreement............................ C-1 ANNEX D -- Interim Order.................................... D-1 ANNEX E -- Plan of Arrangement............................. E-1 ANNEX F -- Exchangeable Share Provisions................... F-1 ANNEX G -- Special Preferred Voting Stock Provisions........ G-1 ANNEX H -- Form of Support Agreement........................ H-1 ANNEX I -- Form of Voting and Exchange Trust Agreement..... I-1 ANNEX J -- Goldman Sachs Fairness Opinion.................. J-1 ANNEX K -- Salomon Brothers Fairness Opinion................ K-1 ANNEX L -- RBC DS Fairness Opinion......................... L-1 ANNEX M -- Section 184 of the ABCA.......................... M-1
4 14 SUMMARY The following is a summary of certain information contained elsewhere in this Joint Proxy Statement. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained in this Joint Proxy Statement. Stockholders are urged to carefully read this Joint Proxy Statement in its entirety. Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa") merged in August 1997 (the "Parker/Mesa Merger"), which transaction resulted in the creation of Pioneer Natural Resources Company ("Pioneer"). Unless otherwise required by the context, references to historical financial, reserve and other statistical information regarding Pioneer are to historical information relating to Parker & Parsley and its subsidiaries taken as a whole, not including either Mesa and its subsidiaries or the pro forma effect of the transactions described in this Joint Proxy Statement. Unless otherwise required by the context, references to historical financial, reserve and other statistical information regarding Mesa are to historical information relating to Mesa and its subsidiaries taken as a whole. The presentation of combined information regarding Parker & Parsley and Mesa, as well as the presentation of pro forma information regarding the combination of Pioneer and Chauvco Resources Ltd. ("Chauvco"), is specifically identified as such in this Joint Proxy Statement. Unless otherwise indicated, all reserve information is as of December 31, 1996. Certain terms relating specifically to the transactions described in this Joint Proxy Statement and relating to the oil and gas business and used herein are defined in the "Glossary of Terms" included elsewhere in this Joint Proxy Statement. In this Joint Proxy Statement, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. OVERVIEW This Joint Proxy Statement relates to the acquisition by Pioneer of the Canadian and Argentine oil and gas businesses of Chauvco and the spinoff to the holders of Chauvco common shares (the "Chauvco Shareholders") and the holders of options to purchase Chauvco Common Shares (the "Chauvco Optionholders") of Chauvco's Gabonese oil and gas operations and other international interests. These transactions will be accomplished pursuant to the terms of a Combination Agreement (the "Combination Agreement") dated as of September 3, 1997 between Pioneer and Chauvco and the terms of a plan of arrangement (the "Plan of Arrangement") attached as an exhibit to the Combination Agreement which include, without limitation, the issuance of shares of common stock, par value $0.01 per share, of Pioneer ("Pioneer Common Stock") upon consummation of the arrangement contemplated therein (the "Arrangement") and from time to time thereafter upon the exchange of exchangeable shares ("Exchangeable Shares") of Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada"), a newly-formed indirectly owned subsidiary of Pioneer, being issued pursuant to the Arrangement (the transactions contemplated by the Combination Agreement and the Plan of Arrangement being referred to herein collectively as the "Transaction"), whereby, among other things, Pioneer Canada will acquire all of the outstanding common shares of Chauvco ("Chauvco Common Shares") and all of the options to acquire Chauvco Common Shares (the "Chauvco Options"). If the requisite approvals are obtained, including from both the holders of common stock of Pioneer (the "Pioneer Stockholders") and the Chauvco Shareholders, each existing holder of Chauvco Common Shares will automatically transfer each Chauvco Common Share such holder holds to Pioneer Canada in consideration for (i) a fraction (varying between 0.493827 and 0.451467 as detailed herein) of a share of Pioneer Common Stock or an equivalent fraction of an Exchangeable Share, in each case determined in accordance with the Exchange Ratio (as defined herein), and (ii) one common share ("CRI Share") of Chauvco Resources International Ltd. ("CRI"), which will have its principal properties, operations and oil reserves located in Gabon, central west Africa. Only holders resident in Canada may elect to receive Exchangeable Shares, and such holders may elect to have their Chauvco Common Shares transferred for a combination of Pioneer Common Stock and Exchangeable Shares. In certain circumstances, Pioneer has the right to cause Pioneer Canada to deliver fewer shares of Pioneer Common Stock and Exchangeable Shares and to pay cash to the Chauvco Shareholders and the Chauvco Optionholders. In addition, each existing holder of options to purchase Chauvco Common Shares ("Chauvco Options") will automatically transfer each Chauvco Option such holder holds to Pioneer Canada in consideration for (i) one CRI Share and (ii) a number of shares of 5 15 Pioneer Common Stock determined in accordance with the Exchange Ratio and in accordance with the holder's election of whether or not to pay the exercise price of such Chauvco Options in cash. As a result of the Arrangement, Pioneer Canada will become the holder of all Chauvco Common Shares and CRI will be transferred to Chauvco Shareholders and Chauvco Optionholders. Consummation of the Transaction will result in the issuance of up to an aggregate of 25,349,341 shares of Pioneer Common Stock and Exchangeable Shares. The Exchangeable Shares entitle the holders to dividend and other rights economically equivalent to those of shares of Pioneer Common Stock and, through a voting trust, the right to vote at meetings of Pioneer Stockholders. PIONEER THE INFORMATION INCLUDED UNDER THIS HEADING "PIONEER" IS AS OF DECEMBER 31, 1996 AND GIVES EFFECT TO THE COMBINATION OF PARKER & PARSLEY AND MESA (INCLUDING GIVING EFFECT TO THE GREENHILL ACQUISITION (SEE "BUSINESS OF PIONEER -- BUSINESS DESCRIPTION -- RECENT DEVELOPMENTS -- GREENHILL ACQUISITION)), AND IS ON A PRO FORMA BASIS GIVING EFFECT TO THE TRANSACTION AS IF IT HAD OCCURRED ON DECEMBER 31, 1996. The Transaction will strengthen Pioneer's status as a preeminent independent oil and gas company by combining Pioneer's long-lived, low cost oil and gas reserves and gas processing facilities with Chauvco's high quality reserves, significant growth potential and international assets and prospects. After the Transaction, Pioneer will be the second largest independent oil and gas exploration and production company in the United States, based on total proved reserves, with a balanced oil and gas reserve base and significant production and reserve growth potential. Led by a proven management team, Pioneer will continue to have the financial strength and flexibility to pursue an aggressive growth strategy through a coordinated balance of exploitation, exploration and acquisition activities. Pioneer's principal strengths and strategies are the following: Reserves and Operating Areas - Pioneer has 703 MMBOE of reserves, comprised of 2.3 Tcf of natural gas and 315 MMBbls of crude oil and liquids, 85% of which are in the United States, principally the MidContinent region and Texas. Outside the United States, Pioneer has core operating areas in western Canada and Argentina which account for 6% and 9% of proved reserves, respectively. - Pioneer's reserve base is long-lived, with an aggregate reserve to production ratio of approximately 12 years, and well-balanced, with 55% natural gas and 45% crude oil and liquids. - Pioneer operates wells representing approximately 80% of its total proved reserves and is a dominant operator in the United States in the Hugoton, West Panhandle and Spraberry fields. Pioneer also operates in western Canada and Argentina. Drilling and Growth Opportunities - Pioneer has approximately 4,700 drilling locations, of which approximately 3,000 are in the United States, primarily in west Texas and along the Texas and Louisiana coasts, and approximately 1,700 are in western Canada and Argentina. - Pioneer has approximately 2.2 million net undeveloped acres, of which approximately 700,000 are located in the United States and approximately 1.5 million are located in western Canada and Argentina. - Pioneer expects to invest 25% of its 1998 capital expenditure budget in exploration activities, with the balance to be invested in development drilling and exploitation activities. 6 16 Management - Pioneer's management team is led by Jon Brumley and Scott Sheffield. Mr. Brumley is the Chairman of the Board and Mr. Sheffield is the President and Chief Executive Officer. Both Mr. Brumley and Mr. Sheffield are proven leaders in the industry, with well established records of successfully building oil and gas companies. - The Pioneer board of directors (the "Pioneer Board") will be enhanced and expanded to 16 members by the addition of Guy Turcotte, Chauvco's Chief Executive Officer (subject to Pioneer Stockholder approval), and James Baroffio, a member of the Chauvco board of directors (the "Chauvco Board"), both of whom are experienced leaders in the exploration and production industry. - With inside ownership of 14%, the Pioneer Board's and management team's interests in creating value are aligned with those of its stockholders. Objectives and Growth Strategy - Increasing stockholder value. Pioneer's five-year growth goal is to increase stockholder value by doubling operating cash flow through increases in production. Although Pioneer's management team believes it can reach this goal, there can be no assurances that cash flow from operations will double or increase at all. See "Risk Factors" for a discussion of certain risks associated with Pioneer's intent to pursue an aggressive growth strategy. - Development and production enhancement activities. Pioneer seeks to increase reserves and production through exploitation activities, including development drilling and recompletions in its core operating areas. - Exploration. Pioneer's exploration activities use the latest in seismic, drilling and completion technology to identify and drill sites with high reserve potential, such as those in the southern Louisiana transition zone, the Gulf of Mexico, east Texas, western Canada and Argentina. - Acquisitions. Pioneer pursues acquisitions to enhance existing core areas or to establish new core areas. Pioneer's acquisition efforts focus on opportunities to increase reserves and production through both exploitation and exploration activities, with a high degree of operational control. - Increasing natural gas processing capacity in core areas. Pioneer intends to expand the processing capabilities of its gas processing facilities and will strive to obtain additional dedications of third party gas to these plants. By owning and operating these processing facilities, Pioneer retains the processing margin on the gas it produces, as well as on gas produced by third parties. - Maintaining financial strength and flexibility. Pioneer intends to maintain financial strength, flexibility and an investment grade rating for its senior debt by seeking to: (i) maintain its credit ratios consistent with guidelines established by the major credit rating agencies for investment grade companies; (ii) fund its development and exploration activities primarily with internally generated cash flow; (iii) continue a portfolio management approach to its assets so as to direct future investments toward projects that enhance growth; (iv) use hedging strategies to reduce price risk in supporting its capital expenditure budget and its acquisition activities; and (v) reduce per unit operating and general and administrative expenditures. - Aligning the interests of its directors, officers, senior management, key technical personnel and stockholders. Pioneer believes that it is essential to align the interests of management and employees with those of its stockholders through equity-based compensation plans and ownership of Pioneer Common Stock by directors, officers and employees. To attract, retain and motivate quality personnel, Pioneer utilizes the Pioneer Long-Term Incentive Plan (as defined herein) and the Pioneer Employee Stock Purchase Plan (as defined herein). See "Risk Factors -- Cautionary Statement Regarding Forward-Looking Information" and "Business of Pioneer." 7 17 CHAUVCO AND CRI Chauvco, founded in 1981, is an oil and gas company concentrating on the acquisition, exploration, development and production of oil and natural gas resources in Canada in the provinces of Alberta and British Columbia and in Argentina in the provinces of Tierra del Fuego and Neuquen. In addition, in 1996 Chauvco began development operations in Gabon, central west Africa. For information regarding CRI, the shares of which will be distributed to Chauvco Shareholders and Chauvco Optionholders, see Annex A. DATE, TIME AND PLACE OF THE MEETINGS Pioneer. The Pioneer Meeting will be held on December , 1997, at at (Dallas time). Chauvco. The Chauvco Meeting will be held on December , 1997, at at (Calgary time). PURPOSES OF THE MEETINGS Pioneer. The purpose of the Pioneer Meeting is to consider and act upon a proposal to approve the Combination Agreement and the Transaction and such other business as may be properly presented to the meeting. Chauvco. The purpose of the Chauvco Meeting is to consider and act upon a proposal to approve the Arrangement and such other business as may be properly presented to the meeting. RECORD DATES; HOLDERS ENTITLED TO VOTE Pioneer. Only holders of record of shares of Pioneer Common Stock at the close of business on November , 1997, are entitled to notice of and to vote at the Pioneer Meeting. On such date, there were shares of Pioneer Common Stock outstanding, each of which will be entitled to one vote on each matter to be acted upon at the Pioneer Meeting. Chauvco. Only holders of record of Chauvco Common Shares at the close of business on November , 1997 are entitled to notice of and to vote at the Chauvco Meeting, provided that to the extent a person has transferred any Chauvco Common Shares after such record date and the transferee of such shares establishes that such transferee owns such shares and demands not later than 10 days before the Chauvco Meeting to be included in the list of shareholders eligible to vote at the Chauvco Meeting, such transferee will be entitled to vote such shares at the Chauvco Meeting. On such date, there were Chauvco Common Shares outstanding, each of which will be entitled to one vote on each matter to be acted upon at the Chauvco meeting. QUORUM; VOTE REQUIRED Pioneer. The presence, in person or by proxy, at the Pioneer Meeting of the holders of a majority of the shares of Pioneer Common Stock outstanding and entitled to vote at the Pioneer Meeting is necessary to constitute a quorum at the meeting. The affirmative vote of the holders of a majority of the outstanding shares of Pioneer Common Stock present and entitled to vote thereon at the Pioneer Meeting is required to approve the Combination Agreement and the Transaction. Chauvco. The presence, in person or by proxy, at the Chauvco Meeting of not less than two Chauvco Shareholders representing not less than 5% of the Chauvco Common Shares outstanding and entitled to vote at the Chauvco Meeting is necessary to constitute a quorum at the meeting, and the affirmative vote of the holders of not less than two-thirds of the votes cast by the holders of Chauvco Common Shares present is required to approve the Arrangement. 8 18 SUMMARY OF THE TRANSACTION - General. Pursuant to the terms of the Combination Agreement and the Arrangement, if approval is obtained from Pioneer Stockholders of the Combination Agreement and the Transaction and from the Chauvco Shareholders of the Arrangement, Pioneer Canada will acquire all of the outstanding Chauvco Common Shares and Chauvco Options, and CRI will be spun off to Chauvco Shareholders and Chauvco Optionholders. - Court Approval. In addition to approval by Chauvco Shareholders, the Arrangement requires approval by the Court of Queen's Bench of Alberta (the "Court"). Prior to the mailing of this Joint Proxy Statement, Chauvco obtained an interim order of the Court (the "Interim Order") providing for the calling and holding of the Chauvco Meeting and other procedural matters. Subject to approval of the Arrangement by the Chauvco Shareholders at the Chauvco Meeting, the hearing in respect of the final order of the Court (the "Final Order") is scheduled to take place on , 1997 at (Calgary time) in the Court. All Chauvco Shareholders and Chauvco Optionholders who wish to participate or be represented or to present evidence or arguments at that hearing must serve and file a notice of appearance as set out in the Notice of Petition for the Final Order and satisfy any other requirements. At the hearing of the application in respect of the Final Order, the Court will consider, among other things, the fairness and reasonableness of the Arrangement. The Court may approve the Arrangement as proposed or as amended in any manner the Court may direct, subject to compliance with such terms and conditions, if any, as the Court deems fit. - Transfer of Chauvco Common Shares and Related Matters. Under the terms of the Arrangement, each Chauvco Common Share will be transferred to Pioneer Canada in consideration for one CRI Share and (i) a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio (as defined herein) or (ii) a number of Exchangeable Shares determined in accordance with the Exchange Ratio. Chauvco Shareholders who are residents of Canada for the purposes of the Canadian Tax Act (as defined herein) will have the option to elect to have their holdings of Chauvco Common Shares transferred for a combination of shares of Pioneer Common Stock and Exchangeable Shares. All non-Canadian residents and those Canadian residents who fail to make an election will automatically receive shares of Pioneer Common Stock. In any case, each holder of Chauvco Common Shares will receive only a whole number of shares of Pioneer Common Stock, Exchangeable Shares or a combination thereof. In lieu of fractional shares, Pioneer Canada will pay to the holders of Chauvco Common Shares an amount equal to their fractional entitlement determined in accordance with the Arrangement. Holders of Chauvco Common Shares will be entitled to exchange their Chauvco Common Share certificates for Pioneer certificates, Exchangeable Share certificates or a combination thereof and CRI Share certificates upon completing and returning a Letter of Transmittal and Election Form. Holders of the Exchangeable Shares will be entitled at any time following the date on which the Arrangement becomes effective (the "Effective Date") to require Pioneer Canada to exchange such Exchangeable Shares by delivering an equivalent number of shares of Pioneer Common Stock. However, Pioneer Canada must deliver all such requests to Pioneer, whereupon Pioneer has the right to deliver (instead of Pioneer Canada) an equivalent number of shares of Pioneer Common Stock. After the third anniversary of the Effective Date, if certain conditions are met, Pioneer has the right to exchange, and on the fifth anniversary of the Effective Date, there shall be an automatic exchange of, all the outstanding Exchangeable Shares for an equivalent number of shares of Pioneer Common Stock. Upon exchange of all of the Exchangeable Shares, the former holders of Chauvco Common Shares will own approximately 23% of Pioneer's outstanding common stock as of the Effective Date. Pioneer and Pioneer Canada will enter into certain ancillary agreements to ensure that holders of Exchangeable Shares will have voting, dividend and liquidation rights equivalent to those of holders of Pioneer Common Stock. At the Effective Time (as defined herein), each Chauvco Option will vest, if not already vested, and be transferred to Pioneer Canada in consideration for one CRI Share and a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio in which event, in addition to transferring the Chauvco Options to Pioneer Canada, the Chauvco Optionholder will be required to 9 19 pay Pioneer Canada an amount equal to the aggregate exercise price which the Chauvco Optionholder would otherwise be required to pay on the exercise of such options (the "Option Payment"). Alternatively, any Chauvco Optionholder may elect to forego making the Option Payment and thereby reduce the number of shares of Pioneer Common Stock to be received by the number obtained by dividing the Option Payment by the average closing sales price per share of Pioneer Common Stock on the New York Stock Exchange ("NYSE") over the 10 consecutive trading days ending on the third trading day before the date of the Chauvco Meeting (the "Pioneer Stock Price"). See "The Transaction -- Transaction Mechanics and Description of Exchangeable Shares and Other Features" and "-- Procedures For Exchange by Chauvco Shareholders and Chauvco Optionholders." A minimum and maximum of 23,174,899 and 25,349,341 shares of Pioneer Common Stock or Exchangeable Shares, or a combination of both, will be issued upon consummation of the Transaction, based on the minimum and maximum Exchange Ratio and assuming Chauvco Optionholders elect to make the Option Payment. As of the date of this Joint Proxy Statement, there are 74,409,380 shares of Pioneer Common Stock issued and outstanding. The Pioneer Common Stock trades on the NYSE. As a condition precedent to the Arrangement, upon consummation of the Transaction, the Exchangeable Shares and CRI Shares will trade on The Toronto Stock Exchange (the "TSE"). - Exchange Ratio. The Combination Agreement provides that the Exchange Ratio ranges from a maximum of .493827 (if the price of Pioneer Common Stock averages below $33.50) to a minimum of .451467 (if the average price of Pioneer Common Stock is equal to or greater than $39.01), and is based on the average trading price of shares of Pioneer Common Stock during the period of 10 consecutive trading days ending on the third day prior to the Chauvco Meeting. If the Exchange Ratio is above .465116, Pioneer may elect to cause Pioneer Canada to deliver to the Chauvco Shareholders and the Chauvco Optionholders a number of shares of Pioneer Common Stock, Exchangeable Shares or combination thereof based on an Exchange Ratio equal to .465116 and an amount of cash (in Canadian dollars) per Chauvco Common Share or Chauvco Option that would compensate such holders for the balance of the Exchange Ratio. See "The Transaction -- Transaction Mechanics and Description of Exchangeable Shares and Other Features -- The Arrangement." - Appointments to Pioneer Board. The Combination Agreement provides for the appointment or nomination of two Chauvco representatives to the Pioneer Board. See "The Transaction -- Interests of Certain Persons in the Transaction." - Certain Related Agreements. Chauvco and Pioneer have entered into agreements with certain holders of Chauvco Common Shares (Trimac Corporation, Gendis Inc. and Guy J. Turcotte) and Pioneer Common Stock (Richard E. Rainwater, Scott D. Sheffield and I. Jon Brumley) pursuant to which such holders have agreed, at the Chauvco Meeting and the Pioneer Meeting, respectively, to vote their securities in favor of the applicable proposals. Such holders have also agreed to vote against any proposal that might materially adversely affect the Transaction. In addition, Pioneer and Chauvco have entered into agreements with each affiliate (as such term is defined pursuant to Rule 145 under the Securities Act of 1933 (the "Securities Act") of Chauvco (the "Chauvco Affiliates") pursuant to which such persons have agreed that they will not sell, pledge or otherwise dispose of Exchangeable Shares or Pioneer Common Stock unless such transaction is permitted by Rule 145 of the Securities Act, such transaction is registered under the Securities Act or such transaction is exempt from registration under the Securities Act. See "The Transaction -- Other Agreements -- Affiliates Agreements." - Effective Time of the Transaction. It is anticipated that the Transaction will become effective after the requisite shareholder, Court and regulatory approvals have been obtained and are final and all other conditions to the Transaction have been satisfied or waived. It is presently anticipated that the Transaction will become effective on or about December , 1997. - Conditions to the Transaction. The obligations of Pioneer and Chauvco to consummate the Transaction are subject to the satisfaction of certain conditions, including obtaining requisite shareholder, Court and regulatory approvals. See "The Transaction -- The Combination Agreement." 10 20 DISPOSITION BY CHAUVCO OF THE ALLIANCE PIPELINE PROJECT The Combination Agreement provides that, on or prior to the Effective Time, Chauvco shall enter into a transaction causing all of its rights and assets relating to the Alliance Pipeline Project to be distributed to or through an entity for a cash payment to Chauvco of C$13.5 million (plus any additional amounts funded by Chauvco after September 3, 1997 for regular capital needs and commitments). Chauvco currently anticipates that it will convey its approximate 20% interest in the Alliance Pipeline Project prior to the Effective Time to various entities owned directly or indirectly by a limited partnership formed under the laws of the Province of Alberta. For a description of the Alliance Pipeline Project, see "The Transaction -- The Combination Agreement -- Disposition of Chauvco's Interest in Alliance Pipeline Project." RECOMMENDATION OF PIONEER'S BOARD OF DIRECTORS; PIONEER'S REASONS FOR THE TRANSACTION The Pioneer Board believes that the terms of the Combination Agreement and the Transaction are fair to and in the best interest of Pioneer and its stockholders, has approved the Combination Agreement and the Transaction and recommends that the Pioneer Stockholders approve the Combination Agreement and the Transaction. In reaching its conclusion, the Pioneer Board considered a number of strategic, financial and other factors, including: - Establishment of New Core Areas. The Pioneer Board considered the opportunities presented by the establishment of two new core areas in western Canada and Argentina, the benefits of owning Canadian oil and gas reserves in terms of the long-term supply and demand dynamics of the North American energy markets, the attractive operating climate in Argentina and the similarity of the reservoir characteristics in Argentina to Pioneer's domestic properties. - Production Growth. The Pioneer Board considered that the expected oil and gas production volumes from the Chauvco properties, reinvestment projects and the recent growth in production from the Chauvco properties, will accelerate Pioneer's expansion and growth strategies. - Reserve Growth Potential. The Pioneer Board considered the projected reserves of the Chauvco properties based on an evaluation by its engineering staff and believes that the complementary nature of the two companies will provide a strong foundation for growth that will benefit the Pioneer Stockholders. - Accretion to Cash Flow. The Pioneer Board considered that the projected future results of the Transaction will be accretive to discretionary cash flow by approximately 7% in 1998 and 15% in 1999. - Improved Balance Sheet. The Pioneer Board considered that upon consummation of the Transaction, Pioneer's debt to book capitalization ratio will decrease from 47% to 40%, which had been set as a target ratio, and that other credit ratios will approach their targets as well. - Management. The Pioneer Board also considered the depth and breadth of management experience of Mr. Turcotte and Mr. Baroffio, who have each agreed to serve on the Pioneer Board. Both of these individuals have extensive experience and successful track records as builders of oil and gas companies and operations in foreign lands. - Combination Agreement. The Pioneer Board considered the terms and conditions of the Combination Agreement, including the consideration to be paid to Chauvco Shareholders and Chauvco Optionholders in the Transaction. The Pioneer Board considered that the Exchange Ratio fluctuates if the average price of Pioneer Common Stock is between $33.50 and $39.01 per share and that, as the average price increases up to $39.01, the Exchange Ratio will decrease. The Pioneer Board also considered the provisions of the Combination Agreement which prohibit Chauvco and its officers, directors, employees, agents, affiliates and other representatives, and those of Chauvco's subsidiaries, from soliciting or encouraging any Acquisition Transaction (as defined herein) or, subject to the fiduciary duties of the Chauvco Board, from engaging in any discussions or negotiations with any third parties with respect to an Acquisition Transaction. The Pioneer Board further considered the provisions 11 21 of the Combination Agreement which require Chauvco to pay to Pioneer a fee of C$25 million or C$40 million under certain circumstances. - Shareholders Agreements. The Pioneer Board considered that Chauvco and Pioneer have entered into agreements with certain holders of Chauvco Common Shares and Pioneer Common Stock pursuant to which such holders have agreed, at the Chauvco Meeting and the Pioneer Meeting, respectively, to vote their securities in favor of the proposals to be brought before such meetings. In addition, such holders have agreed to vote against any proposal that might materially adversely affect the Transaction. Such Chauvco Shareholders collectively own approximately 48% of the outstanding Chauvco Common Shares and such Pioneer Stockholders collectively own approximately 16% of the outstanding Pioneer Common Stock. - Fairness Opinion. The Pioneer Board received a presentation from Goldman, Sachs & Co., its financial advisor ("Goldman Sachs") at the meeting of the Pioneer Board held on September 3, 1997, and considered the written opinion of Goldman Sachs, rendered on September 3, 1997, that, as of such date and based upon and subject to the factors and assumptions set forth therein, the consideration to be paid by Pioneer pursuant to the Combination Agreement was fair to Pioneer. A copy of Goldman Sachs' written opinion to the Pioneer Board dated as of September 3, 1997 is attached as Annex J to this Joint Proxy Statement. RECOMMENDATION OF CHAUVCO'S BOARD OF DIRECTORS; CHAUVCO'S REASONS FOR THE TRANSACTION The Chauvco Board believes that the Arrangement is fair and in the best interests of Chauvco and the Chauvco Shareholders, has voted unanimously to approve the Arrangement and recommends that the Chauvco's Shareholders approve the Arrangement. In reaching its conclusion, the Chauvco Board reviewed presentations from and discussed the terms and conditions of the Arrangement with: - Chauvco senior management; - representatives of its legal counsel; and - representatives of Salomon Brothers Inc. ("Salomon Brothers") and RBC Dominion Securities Inc. ("RBC DS"), its financial advisors. The Chauvco Board considered a number of factors, including: - Opinions of Experienced Financial Advisors. Each of Salomon Brothers and RBC DS rendered an opinion to the Chauvco Board to the effect that the consideration to be received by the Chauvco Shareholders in the Transaction is fair to the Chauvco Shareholders from a financial point of view. As part of its review of the consideration, RBC DS considered the opportunity to participate in CRI and the Alliance Pipeline Project and concluded that the combined consideration of the one CRI Share and the opportunity to participate in the Alliance Pipeline Project to be received for each Chauvco Common Share would be in the region of C$3.00 to C$4.50. Copies of Salomon Brothers' and RBC DS's written opinions to the Chauvco Board dated as of September 3, 1997 are attached as Annex K and Annex L to this Joint Proxy Statement. - Evaluations of Interested Parties. Beginning in early May 1997, Chauvco, through its financial advisors, conducted an extensive process to seek industry participants to initiate a transaction to enhance shareholder value. As a result, a large number of interested parties evaluated Chauvco, and the Transaction compared favorably to all other proposals. - Premium to Trading Price. The Transaction provides the Chauvco Shareholders with a significant premium to the trading price of the Chauvco Common Shares immediately preceding the announcement of the Transaction. 12 22 - Increased Liquidity. The Pioneer Common Stock should provide Chauvco Shareholders with increased liquidity. - Retention of Gabon. Chauvco Shareholders retain the upside of Chauvco in Gabon and other international opportunities by the spinoff of CRI to Chauvco Shareholders through the distribution of the CRI Shares. - Retention of Alliance. Chauvco Shareholders may retain the upside of Chauvco in the Alliance Pipeline Project by the distribution to Chauvco Shareholders of rights to acquire Chauvco's 20% interest in the Alliance Pipeline Project. - Pioneer Management. Pioneer's senior management, led by Jon Brumley and Scott Sheffield, has a proven track record. - Interest in Larger Entity. Chauvco Shareholders will acquire an interest in Pioneer, which with Chauvco's Canadian and Argentine operations will be one of the largest U.S. based independent oil and gas producers. The strategic and operational fit between the two companies is exceptional. - Retain Two Chauvco Directors. Chauvco Shareholders will retain the benefit of two of Chauvco's directors by the addition of Messrs. Baroffio and Turcotte to the Pioneer Board. INTERESTS OF CERTAIN PERSONS Pursuant to the Combination Agreement, one Chauvco representative will be appointed to the Pioneer Board immediately upon consummation of the Transaction and a second Chauvco representative will be nominated as a director of Pioneer for election at Pioneer's 1998 annual stockholders meeting. In addition, Pioneer has agreed to maintain all rights to indemnification existing at the time of execution of the Combination Agreement in favor of the directors and officers of Chauvco and its subsidiaries in accordance with the charter documents and bylaws of each entity and to the fullest extent permitted under the ABCA. See "The Transaction -- Interests of Certain Persons in the Transaction." Chauvco has entered into executive involuntary termination and severance agreements with each of the officers of Chauvco which provide for a payment in the event that an officer's employment is terminated by Chauvco at any time other than for just cause. In such event, Chauvco is required to pay to such an officer an amount equal to two times such officer's monthly salary and benefits for each year the officer has been employed by Chauvco, subject to a minimum payment equal to the officer's salary and benefits for one year. Chauvco has also created a staff severance plan which provides that an employee will receive between three and six weeks wages per year employed in the event of a change of control of Chauvco and the subsequent termination of the employee. Chauvco has previously adopted an employee retention plan which provides that Chauvco will pay a retention bonus to each employee (including officers) of Chauvco on the date which is 180 days after there has been a change of control, provided that the employee is still employed by Chauvco on that date. The amount of the retention bonus for each employee varies between two and six months' salary and benefits based on their category of employment. If the employee's employment is terminated by Chauvco during such 180-day period, other than for just cause, the employee shall be entitled to a pro rated share of the retention bonus based on the number of days of employment following the change of control, subject to a minimum payment of one-half of the retention bonus. ACCOUNTING TREATMENT The Transaction will be accounted for as a purchase of Chauvco by Pioneer under U.S. generally accepted accounting principles ("U.S. GAAP"). See "The Transaction -- Accounting Treatment." 13 23 BUSINESS COMBINATION COSTS Pioneer and Chauvco expect to incur non-recurring business combination costs in connection with the Transaction estimated to be between $20 million and $30 million. CERTAIN TAX CONSEQUENCES The Transaction has been structured to provide for a deferral from Canadian tax for Chauvco Shareholders who are residents of Canada for the purposes of the Income Tax Act (Canada) (the "Canadian Tax Act"). However, such Chauvco Shareholders will only be entitled to a tax deferral if they elect to receive Exchangeable Shares and they file an election under subsection 85(1) of the Canadian Tax Act. In such circumstances, Chauvco Shareholders who would otherwise incur a gain on the transfer of their Chauvco Common Shares to Pioneer Canada will be able to elect to restrict the proceeds of disposition of their Chauvco Common Shares to the aggregate fair market value of the CRI Shares, cash and shares of Pioneer Common Stock which they receive, and thereby defer the recognition of any gain to the extent of the fair market value of any Exchangeable Shares received. Such Chauvco Shareholders will generally only be able to obtain a tax deferral for as long as they continue to hold the Exchangeable Shares, and will recognize a gain or loss when their Exchangeable Shares are exchanged for shares of Pioneer Common Stock or sold in the open market. HOLDERS OF CHAUVCO COMMON SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM OF THE RECOGNITION OF A CAPITAL GAIN AS A RESULT OF THE TRANSFER OF THEIR CHAUVCO COMMON SHARES TO PIONEER CANADA. UNLESS A HOLDER ELECTS TO RECEIVE EXCHANGEABLE SHARES AND MAKES AN ELECTION UNDER SUBSECTION 85(1) OF THE CANADIAN TAX ACT, A DEFERRAL FROM CANADIAN TAX WILL NOT BE AVAILABLE. SEE "INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS AND CHAUVCO OPTIONHOLDERS." DISSENTER'S RIGHTS Under Delaware law, Pioneer Stockholders will not have appraisal or dissenter's rights relating to the Transaction. Under Canadian law, Chauvco Shareholders will have certain appraisal or dissenter's rights. See "Dissenting Shareholders' Rights" and Annex M of this Joint Proxy Statement. REGULATORY REQUIREMENTS The Transaction is subject to the premerger filing requirements of the HSR Act, and on , 1997, Pioneer, Chauvco and Guy Turcotte made premerger filings under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice. On , 1997, the FTC notified Pioneer, Chauvco and Guy Turcotte that their respective requests for early termination of the waiting period under the HSR Act had been granted and that the waiting period had been terminated. The Transaction is also subject to the expiration of the applicable waiting period under the Competition Act, Canada, and the receipt of necessary approvals under the Investment Canada Act. On , 1997, Pioneer filed a short form notification filing and an application for an advance ruling certificate under the Competition Act and on , 1997, Pioneer made a review application under the Investment Canada Act. Pioneer and Chauvco have applied for and expect to receive rulings or orders of certain provincial securities regulatory authorities in Canada to permit the issuance to Chauvco Shareholders of the CRI Shares, Exchangeable Shares and Pioneer Common Stock and to permit resale of the CRI Shares, Exchangeable Shares and Pioneer Common Stock in such provinces without restriction by a shareholder other than a "control person." All other required regulatory filings either have been or will be made prior to the consummation of the Transaction. See "The Transaction -- Regulatory Matters" and "-- Resale of Exchangeable Shares, Pioneer Common Stock and CRI Shares Received in the Transaction." 14 24 RISK FACTORS In evaluating the Transaction the following risk factors relating to the Transaction, Pioneer and its business, and Chauvco and its business should be taken into account, which risk factors are discussed at greater length under the caption "Risk Factors." - forward-looking statements are contained in this Joint Proxy Statement and, although Pioneer and Chauvco believe they are based on reasonable assumptions, no assurances can be given that actual results may not differ from such forward-looking statements; - the number of Shares of Pioneer Common Stock or Exchangeable Shares to be received by Chauvco Shareholders and Chauvco Optionholders will fluctuate between a certain price range, but will become fixed if the Pioneer Stock Price (as defined herein) is below the floor or above the ceiling determined in the Combination Agreement; - prices for oil, natural gas and NGL production and the costs of acquiring, finding, developing and producing such products are volatile; - Pioneer will continue to have substantial indebtedness upon consummation of the Transaction; - Pioneer's and Chauvco's reserve information is based upon estimates of proved reserves and, in the case of Chauvco, proved and probable reserves, and future net cash flows, which may not prove to be accurate; - Pioneer's and Chauvco's success will depend upon replacement of reserves and successful drilling of its large inventory of exploration projects; - Pioneer's success will depend upon key personnel; - oil and natural gas operations involve risks that may not be fully insured; - international operations are subject to political, economic and other uncertainties; - exposure to foreign exchange risks; - governments regulate the oil and natural gas industry extensively; - oil and natural gas production, development and exploration activities are competitive; - certain provisions of Pioneer's charter and bylaws may discourage a change in control; - restrictions may exist on the payment of dividends; - the price of Pioneer Common Stock may be volatile; and - possible preferential purchase rights relating to core Argentine properties. 15 25 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The unaudited pro forma combined statements of operations data and other financial data of Pioneer for the six months ended June 30, 1997 and for the year ended December 31, 1996 give effect to the Parker/Mesa Merger and the acquisition of Chauvco as if such merger and such acquisition had occurred on January 1, 1996. The unaudited pro forma combined balance sheet data of Pioneer as of June 30, 1997 and December 31, 1996 give effect to the Parker/Mesa Merger and the acquisition of Chauvco as if such merger and such acquisition had occurred on June 30, 1997 and December 31, 1996, respectively. This Summary Pro Forma Combined Financial Information is qualified in its entirety by, and should be read in conjunction with, the Unaudited Pro Forma Combined Financial Statements of Pioneer included elsewhere in this Joint Proxy Statement.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 1997 1996 ------------------ -------------- (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Statements of Operations Data: Revenues: Oil and gas............................................ $ 457,504 $ 881,639 Natural gas processing................................. 11,819 23,184 Interest and other..................................... 5,556 42,419 Gain on disposition of assets, net..................... 2,655 11,966 ---------- ---------- 477,534 959,208 ---------- ---------- Costs and expenses: Oil and gas production................................. 125,682 230,159 Natural gas processing................................. 6,098 11,949 Depletion, depreciation and amortization............... 195,089 378,848 Impairment of oil and gas properties and natural gas processing facilities................................. 2,907 -- Exploration and abandonments........................... 34,968 37,555 General and administrative............................. 47,747 83,955 Interest............................................... 70,353 137,958 Other.................................................. 3,301 4,791 ---------- ---------- 486,145 885,215 ---------- ---------- Income (loss) before income taxes........................... (8,611) 73,993 Income tax benefit (provision).............................. 3,400 (27,000) ---------- ---------- Income (loss) from continuing operations.................... $ (5,211) $ 46,993 ========== ========== Income (loss) from continuing operations per share........ $ (.05) $ .49 ========== ========== Weighted average shares outstanding......................... 96,468 96,769 Other Financial Data: EBITDAEX(a)............................................... $ 294,706 $ 628,354 Ratio of earnings to fixed charges(b)..................... (b) 1.53 Balance Sheet Data (end of period): Working capital........................................... $ 8,500 $ 23,635 Property, plant and equipment, net........................ 4,998,028 4,705,337 Total assets.............................................. 5,303,906 5,060,930 Long-term obligations..................................... 1,891,171 1,701,818 Total stockholders' equity................................ 2,667,209 2,642,485
- --------------- (a) EBITDAEX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAEX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, impairment of oil and gas properties and natural gas processing facilities, and exploration and abandonment costs to income (loss) from continuing operations. Interest 16 26 includes accrued interest expense and amortization of deferred financing costs. EBITDAEX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of Pioneer's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. (b) For purposes of computing the pro forma ratio of earnings to fixed charges, earnings consists of income (loss) from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense, interest capitalized and the portion of rental expense attributable to interest. Earnings for Unaudited Pro Forma Combined Pioneer were inadequate to cover its fixed charges during the six months ended June 30, 1997 by $8.6 million. 17 27 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA Pioneer The following table sets forth selected consolidated financial information of Pioneer for the six months ended June 30, 1997 and 1996 and for each of the five fiscal years in the period ended December 31, 1996. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Pioneer and the Consolidated Financial Statements of Pioneer and the related notes thereto included elsewhere herein.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- --------------------------------------------------- 1997 1996 1996 1995 1994(A) 1993(B) 1992 -------- -------- -------- -------- -------- -------- ------- (UNAUDITED) (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Statements of Operations Data: Revenues: Oil and gas...................................... $ 198.6 $ 192.0 $ 396.9 $ 375.7 $ 337.6 $ 207.2 $ 135.1 Natural gas processing........................... 11.8 11.1 23.8 33.2 39.2 77.5 54.6 Gas marketing.................................... -- -- -- 76.8 103.0 43.8 12.1 Interest and other............................... 2.8 2.4 17.5 11.4 6.9 4.4 4.2 Gain on disposition of assets, net(c)............ 2.7 95.3 97.1 16.6 9.5 23.2 4.2 -------- -------- -------- -------- -------- -------- ------- 215.9 300.8 535.3 513.7 496.2 356.1 210.2 -------- -------- -------- -------- -------- -------- ------- Costs and expenses: Oil and gas production........................... 55.4 57.4 110.3 130.9 127.1 78.3 51.8 Natural gas processing........................... 6.1 6.0 12.5 25.9 33.6 51.6 38.6 Gas marketing.................................... -- -- -- 75.7 101.5 42.8 11.0 Depletion, depreciation and amortization......... 59.5 59.6 112.1 159.1 145.4 80.4 45.6 Impairment of oil and gas properties and natural gas processing facilities...................... -- -- -- 130.5 -- -- -- Exploration and abandonments..................... 18.4 10.8 23.0 27.5 25.2 3.6 4.5 General and administrative....................... 15.0 13.0 28.4 37.4 29.0 23.8 11.6 Interest......................................... 20.2 26.1 46.2 65.4 50.6 23.3 14.7 Other............................................ .8 1.3 2.5 11.3 4.3 3.9 2.3 -------- -------- -------- -------- -------- -------- ------- 175.4 174.2 335.0 663.7 516.7 307.7 180.1 -------- -------- -------- -------- -------- -------- ------- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change........................................... 40.5 126.6 200.3 (150.0) (20.5) 48.4 30.1 Income tax benefit (provision)..................... (14.5) (31.7) (60.1) 45.9 6.5 (17.0) (3.0) -------- -------- -------- -------- -------- -------- ------- Income (loss) before extraordinary item and cumulative effect of accounting change........... 26.0 94.9 140.2 (104.1) (14.0) 31.4 27.1 Extraordinary item................................. -- -- -- 4.3 (.6) -- -- Cumulative effect of accounting change............. -- -- -- -- -- 17.1 -- -------- -------- -------- -------- -------- -------- ------- Net income (loss).................................... $ 26.0 $ 94.9 $ 140.2 $ (99.8) $ (14.6) $ 48.5 $ 27.1 ======== ======== ======== ======== ======== ======== ======= Income (loss) before extraordinary item and cumulative effect of accounting change per share: Primary.......................................... $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05 ======== ======== ======== ======== ======== ======== ======= Fully diluted.................................... $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05 ======== ======== ======== ======== ======== ======== ======= Net income (loss) per share: Primary.......................................... $ .74 $ 2.66 $ 3.92 $ (2.83) $ (.49) $ 1.74 $ 1.05 ======== ======== ======== ======== ======== ======== ======= Fully diluted.................................... $ .71 $ 2.32 $ 3.47 $ (2.83) $ (.49) $ 1.74 $ 1.05 ======== ======== ======== ======== ======== ======== ======= Dividends per share................................ $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10 ======== ======== ======== ======== ======== ======== ======= Weighted average shares outstanding................ 35.4 35.7 35.7 35.3 30.1 27.9 25.8 Other Financial Data: EBITDAEX(d)........................................ $ 138.6 $ 223.0 $ 381.7 $ 232.5 $ 200.7 $ 155.7 $ 95.0 Cash flows from operating activities............... 124.6 120.6 230.1 157.3 129.8 112.2 77.2 Cash flows from investing activities............... (158.0) 147.7 13.7 (53.3) (446.0) (398.2) (111.8) Cash flows from financing activities............... 24.5 (228.4) (245.4) (107.9) 331.4 278.9 33.8 Capital expenditures............................... 170.3 76.9 227.8 228.4 554.9 583.5 129.7 Ratio of earnings to fixed charges(e).............. 3.0 5.8 5.3 (e) (e) 3.0 2.9
18 28
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- --------------------------------------------------- 1997 1996 1996 1995 1994(A) 1993(B) 1992 -------- -------- -------- -------- -------- -------- ------- (UNAUDITED) (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Balance Sheet Data (end of period): Working capital.................................... $ 10.2 $ 57.1 $ 26.1 $ 31.5 $ 43.7 $ 39.5 $ 8.0 Property, plant and equipment, net................. 1,139.4 955.4 1,040.4 1,121.7 1,349.9 802.0 499.1 Total assets....................................... 1,283.5 1,138.6 1,199.9 1,319.2 1,604.9 1,016.9 576.7 Long-term obligations.............................. 376.8 328.0 329.0 603.2 727.2 544.3 225.9 Preferred stock of subsidiary...................... 188.8 188.8 188.8 188.8 188.8 -- -- Total stockholders' equity......................... 554.9 504.4 530.3 411.0 509.6 348.8 295.0
- --------------- (a) Includes amounts relating to the acquisition of Bridge Oil Limited in July 1994 and the acquisition of properties from PG&E Resources Company in August 1994. (b) Includes amounts relating to the acquisition of certain Prudential-Bache Energy limited partnerships in July 1993. Also includes results of operations related to Pioneer's interest in the Carthage gas processing plant that had been deferred in 1992 and 1993 and the gain of $7.3 million recognized on the sale of that interest on June 30, 1993. (c) Includes a gain of $83.3 million in 1996 related to the disposition of certain wholly-owned subsidiaries. (d) EBITDAEX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAEX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, impairment of oil and gas properties and natural gas processing facilities and exploration and abandonment costs to income (loss) before extraordinary item and cumulative effect of accounting change. Interest includes accrued interest expense and amortization of deferred financing costs. EBITDAEX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of Pioneer's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. (e) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income (loss) before income taxes, extraordinary item and cumulative effect of accounting change plus fixed charges net of interest capitalized. Fixed charges consist of interest expense, interest capitalized and the portion of rental expense attributable to interest. Pioneer's 1995 and 1994 earnings were inadequate to cover its fixed charges. The amount of the deficiencies were $150.0 million in 1995 and $20.5 million in 1994. 19 29 Mesa The following table sets forth selected financial information of Mesa for each of the six months ended June 30, 1997 and 1996 and for the five fiscal years in the period ended December 31, 1996. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa and the Consolidated Financial Statements of Mesa and the related notes thereto included elsewhere herein.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------- ----------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ------- -------- ------- ------- ------- ------- ------- (UNAUDITED) (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Statements of Operations Data: Total operating revenue.................... $ 172.1 $ 152.0 $ 311.4 $ 235.0 $ 228.7 $ 222.2 $ 237.1 Total operating expenses................... 124.1 105.6 214.7 187.0 200.0 200.2 210.9 ------- -------- ------- ------- ------- ------- ------- Operating income........................... 48.0 46.4 96.7 48.0 28.7 22.0 26.2 ------- -------- ------- ------- ------- ------- ------- Net interest expense(a).................... (47.5) (66.9) (113.4) (132.7) (131.3) (131.3) (129.9) Other income(b)............................ (2.5) 26.1 25.0 27.1 19.2 6.9 14.5 ------- -------- ------- ------- ------- ------- ------- Income (loss) from continuing operations(c)............................ $ (2.0) $ 5.6 $ 8.3 $ (57.6) $ (83.4) $(102.4) $ (89.2) -------- ------- ------- ------- ------- Dividends on preferred stock............... (11.1) (9.5) ------- ------- Income (loss) from continuing operations applicable to common stock(c)............ $ (13.1) $ (1.2) ======= ======= Income (loss) from continuing operations per common share......................... $ (0.20) $ 0.09 $ (0.02) $ (0.90) $ (1.42) $ (2.61) $ (2.31) ======= ======== ======= ======= ======= ======= ======= Weighted average common shares and common share equivalents outstanding............ 64.3 64.1 64.2 64.1 58.9 39.3 38.6 Other Financial Data: EBITDAEX(d)................................ $ 102.7 $ 135.2 $ 228.6 $ 183.4 $ 160.3 $ 142.4 $ 178.1 Cash flows from operating activities....... 87.8 78.6 101.3 69.2 48.6 32.5 (28.4) Cash flows from investing activities....... (371.7) (19.8) (45.0) (41.4) (40.3) 37.5 (17.0) Cash flows from financing activities....... 288.0 (33.6) (188.7) (22.1) (3.6) (88.5) (29.5) Capital expenditures....................... 372.0 19.7 50.2 42.3 32.6 29.6 69.2 Ratio of earnings to fixed charges(e)...... (e) 1.1 (e) (e) (e) (e) (e) Balance Sheet Data (end of period): Working capital.............................. $ 11.9 $ 18.4 $ 14.8 $ 43.8 $ 115.7 $ 76.2 $ 102.9 Property, plant and equipment, net........... 1,351.7 1,048.7 1,046.4 1,104.8 1,130.4 1,191.8 1,280.3 Total assets................................. 1,505.5 1,413.5 1,213.9 1,486.8 1,484.0 1,533.4 1,676.5 Long-term debt, including current maturities................................. 1,108.3 1,201.7 808.1 1,236.7 1,223.3 1,241.3 1,286.2 Stockholders' equity......................... 263.5 73.7 265.5 67.0 124.6 112.1 184.4
- --------------- (a) Net interest expense represents total interest expense less interest income. (b) See "Business of Pioneer -- Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa -- Results of Operations -- Other Income (Expense)" for additional detail. (c) Loss from continuing operations excludes a $59.4 million ($.92 per common share) extraordinary loss on debt extinguishment for 1996. Net loss attributable to common stock was $60.6 million ($.94 per common share) for the year ended December 31, 1996. Net loss and net loss per share for the years ended December 31, 1995, 1994, 1993 and 1992 and the three months ended March 31, 1997 and 1996 are the same as loss from continuing operations and loss from continuing operations per common share shown above. (d) EBITDAEX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAEX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, impairment of oil and gas properties and exploration costs to loss from continuing operations applicable to common stock. Interest includes accrued interest expense and amortization of deferred financing costs. EBITDAEX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of Mesa's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. (e) For purposes of calculating the ratio of earnings to fixed charges, earnings are defined as loss from continuing operations applicable to common stock plus fixed charges. Fixed charges consist of interest expense, capitalized interest and preferred stock dividends. Earning were inadequate to cover fixed charges for the years ended December 31, 1996 through 1992 by $1.3 million, $58.5 million, $83.5 million, $105.3 million and $91.6 million, respectively, and for the six months ended June 30, 1997 by $24.2 million. 20 30 Chauvco. The following table sets forth selected financial information of Chauvco for the six months ended June 30, 1997 and 1996 and for the five fiscal years in the period ended December 31, 1996. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Chauvco and the Consolidated Financial Statements of Chauvco and the related notes thereto included elsewhere herein. See Note 11 to the Consolidated Financial Statements for a reconciliation of Canadian generally accepted accounting principles ("GAAP") in Canadian dollars to U.S. GAAP in Canadian Dollars.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------- --------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Canadian GAAP Revenue............................... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 C$136,794 C$121,906 Net income............................ 19,178 16,979 34,131 25,425 29,052 28,220 22,726 Net income per share.................. 0.40 0.35 0.71 0.54 0.65 0.64 0.53 U.S. GAAP Revenue............................... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 (a) (a) Net income............................ 21,280 19,259 41,276 33,337 24,562 (a) (a) Net income per share.................. 0.44 0.40 0.85 0.71 0.55 (a) (a)
AS OF AS OF DECEMBER 31, JUNE 30, --------------------------------------------------------- 1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Canadian GAAP Working capital (deficiency)..................... C$ (3,912) C$ (7,441) C$ 7,477 C$ (749) C$(11,872) C$ 631 Total assets..................................... 830,493 637,436 590,490 564,652 384,603 332,052 Long-term debt................................... 285,926 127,207 139,087 180,715 51,405 50,303 Shareholders' equity............................. 417,906 397,751 362,892 281,442 250,277 219,958 U.S. GAAP Working capital.................................. C$ (3,912) C$ (7,441) C$ 7,477 (a) (a) (a) Total assets..................................... 782,264 585,453 526,601 (a) (a) (a) Long-term debt................................... 285,926 127,207 139,087 (a) (a) (a) Shareholders' equity............................. 391,375 369,118 327,114 (a) (a) (a)
- --------------- (a) U.S. GAAP information for these periods is not available. 21 31 RISK FACTORS Shareholders should carefully review the following factors together with the other information contained in this Joint Proxy Statement prior to voting on the proposals herein. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Joint Proxy Statement includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical fact included in this Joint Proxy Statement including, without limitation, the statements under "Summary -- Pioneer," "Business of Pioneer -- Overview of the Pioneer Enterprise," "-- Management's Discussion and Analysis of Financial Condition and Results of Operations of Pioneer," "-- Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa" and "Business of Chauvco -- Management's Discussion and Analysis of Financial Condition and Results of Operations of Chauvco" are forward-looking statements. Although Pioneer and Chauvco believe their respective expectations are based on reasonable assumptions, no assurance can be given that actual results may not differ materially from those in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations of Pioneer and Chauvco include, among other things, the prices received or demand for oil and gas, the uncertainty of reserve estimates, operating hazards, competition and the effects of governmental and environmental regulation, conditions in the capital markets and equity markets, and the ability of Pioneer to achieve the goals described in "The Transaction -- Recommendation of Pioneer's Board of Directors; Reasons for the Transaction" and "-- Recommendation of Chauvco's Board of Directors; Reasons for the Transaction," as well as other factors discussed in this Joint Proxy Statement. EXCHANGE RATIO DETERMINATION Stockholders of Pioneer and Chauvco should consider that the number of shares of Pioneer Common Stock or Exchangeable Shares to be received by Chauvco Shareholders and Chauvco Optionholders will be established by the Exchange Ratio that will depend upon the average per share market price of Pioneer Common Stock over a specified period prior to the Chauvco Meeting. As the average price increases between $33.50 and $39.01, the Exchange Ratio will decrease from 0.493827 to 0.451467. Alternatively, as the average price decreases between $39.01 and $33.50, the Exchange Ratio will increase from 0.451467 to 0.493827. However, if the average price falls below $33.50, the Exchange Ratio will cease to increase and Chauvco Shareholders and Chauvco Optionholders will not receive any additional consideration for their Chauvco Common Shares and Chauvco Options. If the average price rises above $39.01, the Exchange Ratio will cease to decrease and Chauvco Shareholders and Chauvco Optionholders will receive the benefit of such increase in price. See "The Transaction -- Transaction Mechanics and Description of Exchangeable Shares and Other Features -- The Arrangement." EFFECT OF VOLATILE PRODUCT PRICES AND MARKETS The future financial condition and results of operations of Pioneer and Chauvco will depend upon the prices received for oil and natural gas production and NGLs and the costs of acquiring, finding, developing and producing reserves. Prices for oil, natural gas and NGLs are subject to fluctuations in response to relatively minor changes in supply, demand, market uncertainty and a variety of additional factors that are beyond the control of Pioneer and Chauvco. These factors include worldwide political instability (especially in the Middle East and other oil-producing regions), the foreign supply of oil and gas, the price of foreign imports, the level of consumer product demand, government regulations and taxes, the price and availability of alternative fuels and the overall economic environment. A substantial or extended decline in oil, gas or NGL prices would have a material adverse effect on Pioneer's or Chauvco's financial position, results of operations, quantities of oil and gas that may be economically produced and access to capital. The sale of oil and gas production of Pioneer and Chauvco depends upon a number of factors beyond their control, including market demand, as well as the availability and capacity of transportation and processing facilities. A substantial portion of Pioneer's and Chauvco's oil and a significant portion of their 22 32 natural gas is transported through gathering systems and pipelines which are not owned by Pioneer or Chauvco. Transportation space on such gathering systems and pipelines is occasionally limited and at times unavailable due to repairs or improvements being made to such facilities or due to such space being utilized by other oil and gas shippers that may or may not have priority transportation agreements. Neither Pioneer nor Chauvco has experienced any material inability to market its proved reserves of oil or natural gas as a result of limited access to transportation space. If transportation space is materially restricted or is unavailable in the future, Pioneer's or Chauvco's ability to market its oil or natural gas could be impaired and cash flow from the affected properties could be reduced, which could have a material adverse effect on Pioneer's or Chauvco's financial condition or results of operations. See "Business of Pioneer -- Governmental Regulation" and "Business of Chauvco -- Governmental and Environmental Regulation." Oil, natural gas and NGL prices have historically been volatile and are likely to continue to be volatile in the future. Such volatility makes it difficult to estimate the value of producing properties for acquisition and to budget and project the financial return on exploration and development projects involving producing properties. In addition, unusually volatile prices often disrupt the market for oil and gas properties, as buyers and sellers have more difficulty agreeing on the purchase price of properties. In particular, from January 1, 1997 to September 25, 1997, the prices of crude oil have ranged from a high of $26.62 per Bbl to a low of $18.53 per Bbl and gas prices have ranged from a high of $3.64 per Mcf to a low of $1.78 per Mcf, in each case as the reported NYMEX Daily Prompt Month Closing Price. Both Pioneer and Chauvco engage in hedging activities with respect to portions of their respective projected oil and gas production through a variety of financial arrangements designed to protect against price declines, including swaps, collars and futures agreements, and Pioneer and Chauvco expect to continue to do so. To the extent that Pioneer or Chauvco engage in such activities, they may be prevented from realizing the benefits of price increases above the levels reflected in such hedges. SUBSTANTIAL INDEBTEDNESS Upon consummation of the Transaction, Pioneer will have long-term indebtedness (including current maturities) of approximately $1.8 billion, consisting of an estimated $819 million in borrowings under an unsecured revolving bank credit facility (the "Pioneer Credit Facility"), $358 million attributable to senior notes and $577 million attributable to senior subordinated notes. Pioneer's level of indebtedness will have several important effects on its future operations, including that (i) a portion of Pioneer's cash flow from operations will be dedicated to the payment of interest on its indebtedness and will not be available for other purposes, (ii) the covenants contained in the Pioneer Credit Facility and in the indentures governing the senior subordinated notes will require Pioneer to meet certain financial tests and other restrictions, limit its ability to borrow additional funds, to grant liens, to dispose of assets, and to pay dividends, and will affect Pioneer's flexibility in planning for and reacting to changes in its business, including possible acquisition activities, and (iii) Pioneer's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired. Pioneer's ability to meet its debt service obligations and to reduce its total indebtedness will be dependent upon Pioneer's future performance, which will depend in part on oil and gas prices received, Pioneer's level of production and general economic conditions and financial, business and other factors affecting the operations of Pioneer, many of which are beyond its control. There can be no assurance that Pioneer's future performance will not be adversely affected by such changes in oil and gas prices and production, and by such economic conditions and financial, business and other factors. Consummation of the Transaction will result in a decrease in Pioneer's total indebtedness to book capitalization ratio although, in the future, it is anticipated that such indebtedness ratio will fluctuate. Pioneer may take several courses of action designed to reduce its total indebtedness in the future, including the sale of assets and other actions that Pioneer may deem appropriate. There can be no assurance that Pioneer will take these actions, that market conditions and other factors will permit Pioneer to take such actions, or that any of these actions will be successful if taken. See "Business of Pioneer -- Overview of the Pioneer Enterprise" and "-- Business Description -- Financial Management." 23 33 RELIANCE ON ESTIMATES OF RESERVES AND FUTURE NET CASH FLOWS Information relating to Pioneer's and Chauvco's oil and gas reserves set forth in this Joint Proxy Statement is based upon engineering estimates. Reserve engineering is a subjective process of estimating the recovery from underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions concerning future oil and gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, all of which may in fact vary considerably from actual results. Because all reserve estimates are to some degree speculative, the quantities of oil and natural gas that are ultimately recovered, production and operation costs, the amount and timing of future development expenditures, and future oil and natural gas sales prices may all vary from those assumed in these estimates. Those variances may be material. In addition, different reserve engineers may make different estimates of reserve quantities and cash flows based upon the same available data. The present value of estimated future net cash flows should not be construed as the current market value of the estimated oil and gas reserves attributable to Pioneer's or Chauvco's properties. In accordance with applicable requirements of the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand for oil and gas, curtailments or increases in consumption by gas purchasers and changes in governmental regulations or taxation. The timing of actual future net cash flows from reserves, and thus their actual present value, will be affected by the timing of both the production and the incurrence of expenses in connection with development and production of oil and gas properties. In addition, the 10% discount factor, which is required by the SEC to be used to calculate discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with Pioneer's or Chauvco's business or the oil and gas industry in general. REPLACEMENT OF RESERVES AND UNPROVED PROPERTIES Pioneer's and Chauvco's future success will depend on their ability to find, develop or acquire additional oil and gas reserves that are economically recoverable. The reserves of Pioneer and Chauvco will generally decline as reserves are depleted, except to the extent that Pioneer and Chauvco conduct successful exploration or development activities or acquire properties containing reserves, or both. There can be no assurance that Pioneer's or Chauvco's planned development and exploration projects and acquisition activities will result in significant additional reserves or that Pioneer and Chauvco will have success drilling productive wells at low finding and development costs. Furthermore, while Pioneer's and Chauvco's revenues may increase if prevailing oil and gas prices increase significantly, Pioneer's and Chauvco's finding costs for additional reserves could also increase. Upon consummation of the Transaction, Pioneer will have unproved property costs of over $900 million. U.S. GAAP requires periodic evaluation of these costs on a project-by-project basis in comparison to their estimated value. These evaluations will be affected by results of exploration activities, future sales or expiration of all or a portion of such projects. If the quantity of proved reserves determined by such evaluations are not sufficient to fully recover the cost invested in each project, Pioneer may be required to recognize significant non-cash charges in the earnings of future periods. There can be no assurance that economic reserves will be determined to exist for such projects. DEPENDENCE ON KEY PERSONNEL Pioneer is dependent upon the efforts of Mr. Brumley and Mr. Sheffield, its Chairman of the Board and Chief Executive Officer, respectively. The loss of the services of either of such individuals or of one or more of 24 34 the other members of Pioneer's senior management team could impede Pioneer's ability to achieve its goals. Pioneer currently maintains key-man insurance on Mr. Brumley and Mr. Sheffield. OPERATING HAZARDS; LIMITED INSURANCE COVERAGE Pioneer's and Chauvco's operations are subject to hazards and risks inherent in drilling for and production and transportation of natural gas and oil, such as fires, natural disasters, explosions, encountering formations with abnormal pressures, blowouts, cratering, pipeline ruptures and spills, any of which can result in loss of hydrocarbons, environmental pollution, personal injury claims and other damage to the properties of Pioneer or Chauvco and others. These risks could result in substantial losses to Pioneer and Chauvco due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Moreover, Pioneer's Gulf of Mexico offshore operations will be subject to a variety of operating risks peculiar to the marine environment, such as hurricanes or other adverse weather conditions, to more extensive governmental regulation, including regulations that may, in certain circumstances, impose strict liability for pollution damage, and to interruption or termination of operations by governmental authorities based on environmental or other considerations. As protection against operating hazards, Pioneer and Chauvco have maintained insurance coverage against some, but not all, potential losses. Pioneer's and Chauvco's coverages include, but are not limited to, operator's extra expense, physical damage on certain assets, employer's liability, comprehensive general liability, automobile, workers' compensation and limited coverage for sudden environmental damages, but Pioneer and Chauvco do not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost. Moreover, Pioneer and Chauvco do not believe that insurance coverage for the full potential liability that could be caused by sudden environmental damages is available at a reasonable cost. Accordingly, each of Pioneer and Chauvco may be subject to liability or may lose substantial portions of its properties in the event of environmental damages. The occurrence of an event that is not fully covered by insurance could have an adverse effect on Pioneer's and Chauvco's financial condition and results of operations. INTERNATIONAL OPERATIONS At present, Pioneer and Chauvco have operations currently being conducted in Argentina, Guatemala and Gabon. Pioneer may also commence operations in other countries. International operations are subject to political, economic and other uncertainties, including, among other things, risk of war, revolution, border disputes, expropriation, renegotiation or modification of existing contracts, import, export and transportation regulations and tariffs, taxation policies, including royalty and tax increases and retroactive tax claims, exchange controls, limits on allowable levels of production, currency fluctuations, labor disputes, and other uncertainties arising out of foreign government sovereignty over Pioneer's international operations. Certain regions of the world have a history of political and economic instability. Such instability could result in new governments or the adoption of new policies that might display a substantially more hostile attitude toward foreign investment. Furthermore, in the event of a dispute arising from international operations, Pioneer may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of courts in the United States. EXCHANGE RATE FLUCTUATIONS Chauvco is exposed to foreign exchange risks since a portion of its expenditures are in Central African Francs ("CFA Francs"). The exchange rate between CFA Francs and U.S. dollars has varied substantially in the last five years. The CFA Franc was fixed to the French franc at CFA Franc 50; French franc 1 from 1948 until its devaluation by 50% on January 12, 1994. Parity is currently fixed at CFA Franc 100; French franc 1. In addition, Pioneer is exposed to foreign exchange risks since a portion of its expenditures are in Guatemala, and Pioneer will be exposed to foreign exchange risks in Argentina, Canada and any other foreign country in which it operates. 25 35 GOVERNMENTAL REGULATION General. Pioneer's and Chauvco's operations are affected from time to time in varying degrees by political developments and federal, provincial and state laws and regulations. In particular, oil and natural gas production, operations and economics are or have been affected by price controls, production controls, taxes, royalties and export and import regulations and other laws relating to the oil and natural gas industry, by changes in such laws and by changes in administrative regulations. Pioneer and Chauvco cannot predict how existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws, regulations and other controls will be adopted, or the effect such changes may have on its business or financial condition. Environmental. Pioneer's and Chauvco's operations are subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations require the acquisition of a permit before drilling commences or before the construction of pipelines, plants and other facilities, restrict the types and locations of wells and facilities, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and impose substantial liabilities for pollution which might result from Pioneer's and Chauvco's operations and may require environmental assessment and public hearings before exploration or development projects may be initiated or significant changes may be made to existing facilities . Moreover, the recent trend toward stricter standards in environmental legislation and regulation is likely to continue. For instance, legislation has been proposed in the U.S. Congress from time to time that would reclassify certain crude oil and natural gas exploration and production wastes as "hazardous wastes" which would make the reclassified wastes subject to much more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted it could have a significant impact on the operating costs of Pioneer, as well as the oil and gas industry in general. Initiatives to further regulate the disposal of crude oil and natural gas wastes pending in certain states or other jurisdictions could have a similar impact and Pioneer and Chauvco could incur substantial costs to comply with environmental laws and regulations. In addition to compliance costs and increased reporting requirements, government entities and other third parties may assert substantial liabilities, fines, or penalties against owners and operators of oil and gas properties for oil spills, discharge of hazardous materials, remediation, improper abandonment and clean-up costs and other environmental damages, including damages caused by previous property owners or cause the suspension or revocation of necessary licenses and authorizations. The imposition of any such liabilities, fines or penalties on Pioneer or Chauvco or such suspension or revocation could have a material adverse effect on Pioneer's or Chauvco's financial condition and results of operations. The Oil Pollution Act of 1990 imposes a variety of regulations on "responsible parties" related to the prevention of oil spills. The implementation of new, or the modification of existing, environmental laws or regulations, including regulations promulgated pursuant to the Oil Pollution Act of 1990, could have a material adverse effect on Pioneer. See "Business of Pioneer -- Environmental and Health Controls." COMPETITION Pioneer and Chauvco operate in the highly competitive areas of natural gas and oil production, development and exploration. Pioneer and Chauvco also compete with companies for the acquisition of desirable natural gas and oil properties, as well as for the equipment and labor required to develop and operate such properties. Factors affecting Pioneer's and Chauvco's ability to compete in the marketplace include the availability of funds and information relating to a property, the standards established by Pioneer and Chauvco for the minimum projected return on investment, the availability of alternate fuel sources and the transportation of gas. Pioneer's and Chauvco's competitors include major integrated oil companies and a substantial number of independent energy companies, many of which may have substantially larger financial resources, staffs and facilities than Pioneer or Chauvco. 26 36 ANTI-TAKEOVER PROVISIONS Pioneer's Certificate of Incorporation, as amended and restated (the "Pioneer Restated Certificate"), (i) provides for staggered terms of office for directors; (ii) contains a "fair price" provision; (iii) prohibits stockholders from acting by written consent; (iv) prohibits stockholders from calling special meetings of stockholders; (v) requires certain procedures to be followed and time periods to be met for any stockholder to propose matters to be considered at annual meetings of stockholders, including nominating directors for election at those meetings; (vi) limits the ability of stockholders to interfere with the power of the Pioneer Board in other specified ways; (vii) requires supermajority votes to amend any of the preceding provisions; and (viii) authorizes the Pioneer Board to issue up to 100,000,000 shares of preferred stock without stockholder approval and to set the rights, preferences, and other designations, including voting rights, of those shares as the Pioneer Board may determine. See "Description of Capital Stock -- Pioneer Capital Stock -- Certain Provisions of the Certificate of Incorporation and Bylaws." These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control of Pioneer, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of Pioneer Common Stock. Pioneer is also subject to provisions of the DGCL that may make some business combinations more difficult. See "Description of Capital Stock -- Pioneer Capital Stock -- Delaware Anti-Takeover Statute." RESTRICTIONS ON DIVIDENDS Dividends will be paid on Pioneer Common Stock only if, as and when declared by the Pioneer Board. Pioneer's ability to pay dividends may be limited by the terms of its credit facilities, debt indentures, and preferred stock. Pioneer intends to pay a $0.05 dividend semi-annually. No assurance can be given about the amount or timing of dividends, if any, that Pioneer may pay, about whether Pioneer will be permitted to pay dividends following the Transaction, or about the ability of Pioneer to obtain waivers or amendments of covenants limiting or prohibiting dividend payments. There is no current intention on the part of the Chauvco Board to pay any dividends on the Chauvco Common Shares. POSSIBLE VOLATILITY OF STOCK PRICE Following the Transaction, the market price for Pioneer Common Stock may be highly volatile depending on various factors, including the general economy, stock market conditions, announcements by Pioneer, its competitors and fluctuations in Pioneer's overall operating results. In addition, the stock market historically has experienced volatility which has affected the market price of securities of many companies and which has sometimes been unrelated to the operating performance of such companies. The market price of the Pioneer Common Stock could also be subject to significant fluctuations in response to variations in quarterly results of operations, changes in earnings estimates by analysts, governmental regulatory action, general trends in the industry and overall market conditions, and other factors. POSSIBLE PREFERENTIAL PURCHASE RIGHT In September 1997, Chauvco received a written notice from YPF S.A. ("YPF") that, in its view, consummation of the Transaction would permit YPF to exercise its preferential right under its agreements with Chauvco to purchase the Tierra del Fuego production concession located in Argentina. See "Business of Chauvco -- Petroleum and Natural Gas Operations -- Description of Properties -- Tierra del Fuego." Based upon legal advice, Chauvco and Pioneer do not believe that YPF's preferential purchase right will be triggered upon consummation of the Transaction, and Chauvco's legal counsel has so informed YPF. There can be no assurance, however, that YPF's position would not prevail in arbitration or litigation. YPF has not asserted its view of the value of the Tierra del Fuego production concession. If YPF were to prevail in arbitration or litigation, there is a high degree of risk that YPF will dispute Pioneer's allocation of purchase price to the Tierra del Fuego production concession. Pioneer's preliminary allocation of purchase price for the Tierra del Fuego production concession is $ million. 27 37 REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES The consolidated financial statements of, and the summaries of historical consolidated financial information concerning, Chauvco contained in this Joint Proxy Statement are reported in Canadian dollars and have been prepared in accordance with Canadian GAAP, which differs in certain material respects from U.S. GAAP. See Note 11 of Notes to Chauvco's Consolidated Financial Statements, which presents a reconciliation of such consolidated financial statements from Canadian GAAP to U.S. GAAP. The pro forma financial statements contained in this Joint Proxy Statement for Chauvco have been converted to U.S. dollars using the period end exchange rate for each balance sheet and the period end average exchange rate for each statement of operations. The historical exchange rates in effect for each period are displayed in the table below. In addition, certain adjustments to the pro forma financial statements of Chauvco have been made to conform such pro forma financial statements to U.S. GAAP. The consolidated financial statements and the pro forma financial statements of and the summaries of historical consolidated financial information concerning Pioneer and Mesa contained in this Joint Proxy Statement are reported in U.S. dollars and have been prepared in accordance with U.S. GAAP. IN THIS JOINT PROXY STATEMENT, UNLESS OTHERWISE INDICATED, ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS. EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS The following table sets forth, for each period indicated, the average rate for one Canadian dollar expressed in U.S. dollars on the last day of each month during such period and the exchange rate at the end of such period, based upon the noon buying rate in New York City for cable transfers in Canadian dollars, as certified for customer purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"):
SIX MONTH PERIOD ENDED JUNE 30, TWELVE MONTH PERIOD ENDED DECEMBER 31, --------------- ------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ ------ ------ High.................................. .7487 .7391 .7513 .7527 .7632 .8046 .8757 Low................................... .7146 .7235 .7235 .7023 .7103 .7439 .7761 Average............................... .7269 .7310 .7330 .7307 .7302 .7733 .8242 Period end............................ .7241 .7322 .7301 .7323 .7128 .7544 .7865
On September 25, 1997, the exchange rate for one Canadian dollar expressed in U.S. dollars based on the Noon Buying Rate was .7224. The following table sets forth, for each period indicated, the average exchange rate for one U.S. dollar expressed in Canadian dollars on the last date of each month during such period and the exchange rate at the end of such period, based upon the noon spot rate of the Bank of Canada (the "Noon Spot Rate"):
SIX MONTH PERIOD ENDED JUNE 30, TWELVE MONTH PERIOD ENDED DECEMBER 31, ----------------- ------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ------- ------- ------ ------ ------ ------ ------ High........................... 1.3995 1.3860 1.3860 1.4235 1.4074 1.3399 1.2887 Low............................ 1.3353 1.3525 1.3306 1.3282 1.3102 1.2423 1.1416 Average........................ 1.3762 1.3677 1.3643 1.3686 1.3698 1.2936 1.2140 Period end..................... 1.3811 1.3651 1.3696 1.3652 1.4028 1.3240 1.2711
On September 25, 1997, the Noon Spot Rate was one U.S. dollar equals 1.3840 Canadian dollars. 28 38 COMPARATIVE MARKET PRICE DATA The following table sets forth the high and low sales prices and trading volumes of the Pioneer Common Stock, traded under the symbol "PXD" on the NYSE, and of the Chauvco Common Shares, traded under the symbol "CHA" on the TSE, for the periods indicated. The quotations are as reported in published financial sources.
PIONEER CHAUVCO ---------------------------------- ---------------------------------- HIGH LOW HIGH LOW NYSE NYSE VOLUME TSE TSE VOLUME ---- ---- ---------- ---- --- ---------- 1995 Quarter ended March 31 .............. $22 7/8 $16 5/16 13,771,900 C$18 7/8 C$15 3/8 1,288,863 Quarter ended June 30................ 22 3/4 18 5/8 6,016,700 18 15 1/4 2,659,433 Quarter ended September 30........... 23 1/4 17 3/8 8,065,200 15 5/8 11 1/8 3,458,631 Quarter ended December 31............ 22 17 1/2 6,089,600 12 1/2 11 1,356,169 1996 Quarter ended March 31 .............. $23 3/4 $19 3/8 8,257,800 C$13 1/2 C$11 5/8 2,439,175 Quarter ended June 30................ 27 7/8 22 3/4 9,044,200 12 3/4 10 1/2 8,222,241 Quarter ended September 30........... 27 3/4 22 1/4 5,899,200 12 9 3/4 2,899,044 Quarter ended December 31............ 37 1/4 26 1/8 12,193,600 15 1/10 11 1/20 5,022,018 1997 Quarter ended March 31............... $37 5/8 $28 7/8 9,076,700 C$17 C$13 1/2 8,443,599 Quarter ended June 30................ 36 3/16 28 1/2 24,597,500 21 1/2 15 17/20 4,658,082 Quarter ended September 30 (through September 26)...................... 44 3/8 34 3/4 22,826,800 32 1/10 19 1/2 17,801,486
On September 2, 1997, the last full trading day prior to the joint public announcement by Pioneer and Chauvco of the proposed Transaction, the last reported sales price on the NYSE of the Pioneer Common Stock was $41 3/4 and the high and low sales prices were $42 and $39 3/4, respectively. The last reported sales price of the Chauvco Common Shares on the TSE on the same day was C$21.50, and the high and low sales prices were C$21.50 and C$21.00, respectively. On November , 1997, the last reported sales price per share of the Pioneer Common Stock was $ , and the last reported sales price of the Chauvco Common Shares was C$ . On November , 1997, there were shares of Pioneer Common Stock outstanding held of record by stockholders and Chauvco Common Shares outstanding held of record by shareholders. DIVIDEND POLICIES Pioneer intends to pay dividends of $0.05 per share of common stock semi-annually. Chauvco has not paid dividends on its capital stock. 29 39 COMPARATIVE PER SHARE DATA The following tables set forth certain historical per share data of Pioneer and Chauvco and per share data of an unaudited pro forma basis after giving effect to the Transaction. This data should be read in conjunction with the "Business of Pioneer -- Selected Historical Consolidated Financial Data of Pioneer," "Unaudited Pro Forma Combined Financial Statements" and the separate Consolidated Financial Statements of Pioneer and Chauvco and the notes thereto. The unaudited pro forma financial data are not necessarily indicative of the operating results that would have been achieved had the Transaction been in effect as of the beginning of the periods presented and should not be construed as representative of future operations.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ----------------- ----------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- ------- ------- PIONEER Book value per common share............. $ 15.83 $ 14.17 $ 15.12 $ 11.62 $ 14.58 $ 12.49 $ 10.84 Cash dividends per common share......... $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10 Income (loss) per common share before extraordinary item and cumulative effect of accounting change: Primary............................... $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05 Fully-Diluted......................... $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05 CHAUVCO CANADIAN GAAP Book value per common share........... C$ 8.63 C$ 7.87 C$ 8.23 C$ 7.51 C$ 6.32 C$ 5.66 C$ 5.03 Cash dividends per common share....... -- -- -- -- -- Basic income per common share......... C$ .40 C$ .35 C$ .71 C$ .54 C$ .65 C$ .64 C$ .53 U.S. GAAP Book value per common share........... C$ 8.03 C$ 7.17 C$ 7.59 C$ 6.78 C$ 5.34 (a) (a) Cash dividends per common share....... -- -- -- -- Income (loss) per common share........ C$ .44 C$ .40 C$ .85 C$ .71 C$ .55 (a) (a) PIONEER UNAUDITED PRO FORMA Book value per common share............. $ 27.52 N/A $ 27.26 N/A N/A N/A N/A Cash dividends per common share......... .05 N/A .10 N/A N/A N/A N/A Income (loss) from continuing operations per common share...................... $ (.05) $ N/A $ .49 $ N/A $ N/A $ N/A $ N/A UNAUDITED PRO FORMA EQUIVALENT -- CHAUVCO Book value per common share............. C$17.16 N/A C$16.86 N/A N/A N/A N/A Cash dividends per common share......... -- N/A -- N/A N/A N/A N/A Income (loss) per common share.......... C$ (.03) N/A C$ .30 N/A N/A N/A N/A
- --------------- (a) U.S. GAAP information for these periods is not available. 30 40 THE MEETINGS PIONEER Solicitation and Voting of Proxies. The accompanying proxy is solicited on behalf of the Pioneer Board for use at the Pioneer Meeting, to be held at on December , 1997 at (Dallas time). Only holders of record of Pioneer Common Stock at the close of business on the Pioneer Record Date will be entitled to vote at the Pioneer Meeting. At the close of business on the Pioneer Record Date, there were shares of Pioneer Common Stock outstanding and entitled to vote. A majority of those shares, present in person or by proxy, will constitute a quorum for the transaction of business. Abstentions and broker non-votes will be considered to be represented for purposes of a quorum. This Joint Proxy Statement and the accompanying form of proxy were first mailed to Pioneer Stockholders on or about November , 1997. Revocation of Proxies. A Pioneer Stockholder who has given a proxy may revoke it at any time before it is exercised at the Pioneer Meeting by (i) delivering to the secretary of Pioneer (by any means, including facsimile) a written notice stating that the proxy is revoked, (ii) signing and so delivering a proxy bearing a later date or (iii) attending the Pioneer Meeting and voting in person (although attendance at the Pioneer Meeting will not, by itself, revoke a proxy). Expenses of Proxy Solicitation. The expenses of soliciting proxies to be voted at the Pioneer Meeting will be paid by Pioneer. Following the original mailing of the proxies and other soliciting materials, Pioneer and/or its agents also may solicit proxies by mail, telephone, facsimile or in person. Following the original mailing of the proxies and other soliciting materials, Pioneer will request brokers, custodians, nominees and other record holders of Pioneer Common Stock to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Pioneer Common Stock and to request authority for the exercise of proxies. In such cases, Pioneer, upon the request of the record holders, will reimburse such holders for their reasonable expenses. In addition, Pioneer has engaged D.F. King & Associates, Inc. to assist in the solicitation of proxies. Pioneer anticipates that it will incur total fees of approximately $ , plus reimbursement of certain out-of-pocket expenses for this service. Voting of Proxies. Shares represented by all properly executed proxies received in time for the Pioneer Meeting will be voted at such meeting in the manner specified by the holders thereof. If no instructions are indicated, such proxies will be voted FOR approval of the Combination Agreement and the Transaction. A properly executed proxy marked "ABSTAIN," although counted for purposes of determining whether there is a quorum and for purposes of determining the aggregate voting power and number of shares represented and entitled to vote at the Pioneer Meeting, will not be voted. Accordingly, abstentions will have the same effect as a vote against the proposal. Shares represented by "broker non-votes" (i.e., shares held by brokers or nominees which are represented at a meeting but with respect to which the broker or nominee is not empowered to vote on a particular proposal) will be counted for purposes of determining whether there is a quorum at the Pioneer Meeting, but will not be included for purposes of determining the aggregate voting power and number of shares represented at the Pioneer Meeting. Accordingly, "broker non-votes" will have no effect on the proposal to approve the Combination Agreement and the Transaction. It is not expected that any matter other than that referred to herein will be brought before the Pioneer Meeting. If, however, other matters are properly presented at any such meeting, the persons named as proxies will vote in accordance with their judgment with respect to such matters. If a quorum is not present at the Pioneer Meeting, the stockholders entitled to vote who are present or represented by proxy at such meeting have the power to adjourn the Pioneer Meeting from time to time without notice until a quorum is present. At any such adjourned meeting at which a quorum is present, any business may be transacted that may have been transacted at the Pioneer Meeting had a quorum originally been present; provided, that if the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. Proxies solicited by this Joint Proxy Statement may be used to vote in favor of any motion to adjourn the Pioneer Meeting. The persons named on the proxies intend to vote in favor of any motion to adjourn the Pioneer Meeting to a subsequent day if, prior to the 31 41 Pioneer Meeting, such person have not received sufficient proxies to approve the proposals described in this Joint Proxy Statement. If such a motion is approved but sufficient proxies are not received by the time set for the resumption of the Pioneer Meeting, this process will be repeated until sufficient proxies to vote in favor of the proposals to be presented to the stockholders at the Pioneer Meeting have been received or it appears that sufficient proxies will not be received. Voting Rights. Holders of Pioneer Common Stock are entitled to one vote for each share held as of the Pioneer Record Date. Approval by the Pioneer Stockholders of the Combination Agreement and the Transaction is required by the rules of the NYSE. Such approval under Pioneer's bylaws requires the affirmative vote of a majority of the outstanding shares of Pioneer Common Stock present and entitled to vote thereon at the Pioneer Meeting. Auditors. KPMG Peat Marwick LLP, certified public accountants, serve as the independent auditors of Pioneer. Representatives of KPMG Peat Marwick LLP plan to attend the Pioneer Meeting and will be available to answer questions. Its representatives will also have an opportunity to make a statement at the meeting if they so desire, although it is not expected that any statement will be made. CHAUVCO Solicitation and Voting of Proxies. The accompanying proxy is solicited on behalf of the management of Chauvco for use at the Chauvco Meeting to be held at on December , 1997 at (Calgary time). Only holders of record of Chauvco Common Shares at the close of business on the Chauvco Record Date will be entitled to vote at the Chauvco Meeting, subject to the provisions of the ABCA regarding transfers of Chauvco Common Shares after the Chauvco Record Date. See the Chauvco Notice of Special Meeting of Shareholders accompanying this Joint Proxy Statement. At the close of business on the Chauvco Record Date, there were Chauvco Common Shares outstanding and entitled to vote. A quorum of Chauvco Shareholders for the transaction of business at the Chauvco Meeting is not less than two shareholders present, either in person or by duly appointed proxy, holding or representing not less than 5% of the Chauvco Common Shares entitled to be voted at the Chauvco Meeting. To be effective, proxies must be received by Corporate Shareholder Services Inc. prior to the Chauvco Meeting or, if the Chauvco Meeting is adjourned or postponed before the time of the adjourned or postponed Meeting. Revocation of Proxies. Proxies given by Chauvco Shareholders for use at the Chauvco Meeting may be revoked at any time prior to their use. A Chauvco Shareholder giving a proxy may revoke the proxy (i) by instrument in writing executed by the Chauvco Shareholder or by his or her attorney authorized in writing, or, if the Chauvco Shareholder is a corporation, under its corporate seal by an officer or attorney thereof duly authorized indicating the capacity under which such officer or attorney is signing, and deposited either at the registered office of Chauvco (as set forth in this Joint Proxy Statement) at any time up to and including 4:00 p.m. (Calgary time) on the last business day preceding the day of the Chauvco Meeting, or any adjournment or postponement thereof, or with the chairman of the Chauvco Meeting on the day of such Chauvco Meeting or adjournment or postponement thereof, (ii) by a duly executed proxy bearing a later date or time than the date or time of the proxy being revoked, (iii) by voting in person at the Chauvco Meeting (although attendance at the Chauvco Meeting will not in and of itself constitute a revocation of a proxy) or (iv) in any other manner permitted by law. Expenses of Proxy Solicitation. The expenses of soliciting proxies to be voted at the Chauvco Meeting will be paid by Chauvco. Following the original mailing of the proxies and other soliciting materials, Chauvco and/or its agents also may solicit proxies by mail, telephone, facsimile or in person. Following the original mailing of the proxies and other soliciting materials, Chauvco will request brokers, custodians, nominees and other record holders of Chauvco Common Shares to forward copies of the proxy and other soliciting materials to persons for whom they hold Chauvco Common Shares and to request authority for the exercise of proxies. In such cases, Chauvco, upon the request of the record holders, will reimburse such holders for their reasonable expenses. In addition, Chauvco has engaged Corporate Shareholder Services Inc. to assist in the 32 42 solicitation of proxies. Chauvco anticipates that it will incur total fees of approximately $ , plus reimbursement of certain out-of-pocket expenses for this service. Appointment of Proxy and Discretionary Authority. A CHAUVCO SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A SHAREHOLDER OF CHAUVCO) OTHER THAN PERSONS DESIGNATED IN THE FORM OF PROXY ACCOMPANYING THIS JOINT PROXY STATEMENT, AS NOMINEE TO ATTEND AND ACT FOR AND ON BEHALF OF SUCH CHAUVCO SHAREHOLDER AT THE CHAUVCO MEETING AND MAY EXERCISE SUCH RIGHT BY INSERTING THE NAME OF SUCH PERSON IN THE BLANK SPACE PROVIDED ON THE FORM OF PROXY. The form of proxy accompanying this Joint Proxy Statement confers discretionary authority upon the proxy nominees with respect to amendments or variations to the matters identified in the accompanying notice of the Chauvco Meeting and other matters which may properly come before the Chauvco Meeting. The shares represented by proxies at the Chauvco Meeting will be voted in accordance with the instructions of the Chauvco Shareholder on any ballot that may be called for and, where the person whose proxy is solicited specifies a choice with respect to any matter to be voted upon, his or her shares shall be voted in accordance with the specifications so made. If a Chauvco Shareholder appoints a person designated by the management of Chauvco in the form of proxy as nominee and does not direct the management nominee to vote either for or against the matter or matters with respect to which an opportunity to specify how the Chauvco Common Shares registered in the name of such Chauvco Shareholder shall be voted, the proxy shall be voted FOR such matter or matters proposed in this Joint Proxy Statement. The management of Chauvco knows of no matters to come before the Chauvco Meeting other than the matters referred to in the accompanying notice of the Chauvco Meeting. However, if any other matters which are not now known to the management of Chauvco should properly come before the Chauvco Meeting, the shares represented by proxies in favor of management nominees will be voted on such matters in accordance with the best judgment of the proxy nominee. Voting Rights. Holders of Chauvco Common Shares are entitled to one vote for each share held. The Arrangement Resolution must be approved by the affirmative vote of not less than 66 2/3% of the votes cast by the holders of Chauvco Common Shares present (in person or by proxy) and entitled to vote at the Chauvco Meeting. Auditors. Price Waterhouse, chartered accountants, serve as the independent auditors of Chauvco. Representatives of Price Waterhouse plan to attend the Chauvco Meeting and will be available to answer questions. Its representatives will also have an opportunity to make a statement at the meeting if they so desire, although it is not expected that any statement will be made. THE TRANSACTION GENERAL Pioneer and Chauvco have entered into the Combination Agreement which relates to the acquisition by Pioneer of the Canadian and Argentine oil and gas businesses of Chauvco and the spinoff to Chauvco Shareholders and Chauvco Optionholders of Chauvco's Gabonese oil and gas operations and other international interests. Prior to consummation of the Transaction, Chauvco will distribute its 20% interest in the Alliance Pipeline Project. The Combination Agreement provides that, subject to the satisfaction of the conditions thereof, the Transaction will be effected. Pioneer has caused Pioneer Canada to be incorporated as an indirect wholly-owned subsidiary of Pioneer under the Company Act (British Columbia) (the "BCCA"). THE DESCRIPTIONS OF THE COMBINATION AGREEMENT AND THE ARRANGEMENT CONTAINED IN THIS JOINT PROXY STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE COMBINATION AGREEMENT AND THE PLAN OF ARRANGEMENT, COPIES OF WHICH ARE INCLUDED AS ANNEX C AND ANNEX E, RESPECTIVELY, TO THIS JOINT PROXY STATEMENT. 33 43 TRANSACTION MECHANICS AND DESCRIPTION OF EXCHANGEABLE SHARES AND OTHER FEATURES The Arrangement. Pursuant to the terms of the Plan of Arrangement, at the Effective Time, the following shall occur, in the following order: (a) Chauvco shall subscribe for that number of CRI Shares as is equal to (i) the number of Chauvco Common Shares which are issued and outstanding three trading days prior to the Effective Date (the "Record Date"), (ii) plus that number of Chauvco Common Shares which all Chauvco Optionholders would otherwise be entitled to acquire on the exercise of their Chauvco Options on a fully vested basis on the Record Date, (iii) less that number of CRI Shares then held by Chauvco, and (iv) less that number of Chauvco Common Shares held by shareholders who have exercised their rights of dissent in accordance with the Plan of Arrangement and who are ultimately entitled to be paid the fair value for such shares. The subscription price for the CRI Shares shall be paid for in cash in the aggregate amount equal to $5,000,000 plus the fair market value on the Effective Date (as determined and adjusted in accordance with the Plan of Arrangement) of the Gabon Securities as defined in paragraph (b) below; (b) CRI shall purchase from CR International Limited, a wholly-owned subsidiary of Chauvco ("CR"), for cash in an aggregate amount equal to the fair market value thereof on the Effective Date (as determined and adjusted in accordance with the Plan of Arrangement), (i) all of the issued and outstanding securities of the Gabon Subsidiaries (as defined in the Plan of Arrangement), (ii) 75% of the issued and outstanding securities of Westoil, and (iii) all of its rights under a loan in the amount of U.S. $909,421.60 made by CR to Olympic Marine Services International, Inc. (which owns the remaining 25% of the issued and outstanding securities of Westoil), any and all advances made by CR to Westoil, and any and all advances made by Chauvco (all of which shall have first been assigned by Chauvco to CR) to the Gabon Subsidiaries and Westoil (such securities in (b)(i), (ii) and (iii) collectively, the "Gabon Securities"); (c) Chauvco shall transfer, assign and convey to CRI, in consideration for $1.00, all of Chauvco's right, title, benefit and interest in and to any and all trademarks (including registrations and applications therefor), trade names and the internet domain name "chauvco.com" owned by Chauvco as at the Effective Time, and certain other assets and property; (d) Pioneer Canada shall purchase from Chauvco all of the issued and outstanding CRI Shares in consideration of the payment by way of promissory note of Pioneer Canada to Chauvco in an amount equal to the subscription price paid for such CRI Shares by Chauvco under paragraph (a) above; (e) each of the outstanding Chauvco Options which has not been exercised prior to the Record Date will vest, if not already vested, and be transferred to Pioneer Canada in consideration for one (1) CRI Share and, in accordance with the election of each Chauvco Optionholder and the remainder of this paragraph (e) and paragraph (f), a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio in which event, in addition to transferring the Chauvco Options to Pioneer Canada, the Chauvco Optionholder will be required to make the Option Payment. As an alternative to making the Option Payment, Chauvco Optionholders will be entitled to elect to reduce the number of shares of Pioneer Common Stock to be received by the number obtained by dividing the Option Payment by the Pioneer Stock Price (converted into Canadian dollars using the Currency Exchange Rate). Each Chauvco Optionholder will receive only a whole number of shares of Pioneer Common Stock resulting from the transfer of his Chauvco Options. In lieu of fractional shares of Pioneer Common Stock, each Chauvco Optionholder who would otherwise be entitled to receive such fractional shares shall be paid by Pioneer Canada an amount determined in accordance with the Plan of Arrangement in full satisfaction of such fractional entitlement; (f) a Chauvco Optionholder electing to make the Option Payment and receive the applicable number of shares of Pioneer Common Stock under paragraph (e) above must have given effect to the election by depositing with Montreal Trust Company of Canada (the "Depositary"), prior to the Election Deadline (as defined below), a duly completed Option Letter of Transmittal and Election Form indicating such holder's election and by agreeing to pay the Option Payment to the Depositary as agent for Pioneer Canada. Coincident with the receipt of the CRI Shares and shares of Pioneer Common Stock, such Chauvco Optionholder shall pay the Option Payment to the Depositary as agent for Pioneer Canada less any amounts receivable by such Chauvco Optionholder in connection with fractional entitlements under the Plan of 34 44 Arrangement. In the event that a Chauvco Optionholder who has elected to make the Option Payment fails to make the Option Payment on or before the delivery of the securities to the Chauvco Optionholder, the Depositary shall be entitled to sell all or any portion of the shares of Pioneer Common Stock held on behalf of such Chauvco Optionholder to satisfy the Option Payment and remit the same to Pioneer Canada. In the event that a Chauvco Optionholder has failed to validly make an election in the Option Letter of Transmittal and Election Form pursuant to this paragraph, such Chauvco Optionholder shall be deemed to have elected the option to receive the reduced number of shares of Pioneer Common Stock by not making the Option Payment; (g) each of the outstanding Chauvco Common Shares will be transferred to Pioneer Canada in consideration for one (1) CRI Share and, at the election of the holders of the Chauvco Common Shares: (i) a number of shares of Pioneer Common Stock determined in accordance with the Exchange Ratio. Each such holder of Chauvco Common Shares will receive only a whole number of shares of Pioneer Common Stock resulting from the transfer of such holder's Chauvco Common Shares to Pioneer Canada. In lieu of fractional shares of Pioneer Common Stock, each holder of a Chauvco Common Share who otherwise would be entitled to receive such fractional share shall be paid by Pioneer Canada an amount determined in accordance with the Plan of Arrangement in full satisfaction of such fractional entitlement; or (ii) a number of shares of Exchangeable Shares determined in accordance with the Exchange Ratio. Each such holder of Chauvco Common Shares will receive only a whole number of Exchangeable Shares resulting from the transfer of such holder's Chauvco Common Shares to Pioneer Canada. In lieu of fractional Exchangeable Shares, each holder of a Chauvco Common Share who otherwise would be entitled to receive such fractional share shall be paid by Pioneer Canada an amount determined in accordance with the Plan of Arrangement in full satisfaction of such fractional entitlement; provided that, such holders shall be entitled to elect to receive a combination of shares of Pioneer Common Stock and Exchangeable Shares on the transfer of their Chauvco Common Shares; (h) a holder of Chauvco Common Shares must have given effect to the election in paragraph (g) above by depositing with the Depositary, prior to the date that is two days prior to the Chauvco Meeting (the "Election Deadline"), a duly completed Letter of Transmittal and Election Form. In the event that a holder of Chauvco Common Shares has failed to validly make an election under paragraph (g) in the Letter of Transmittal and Election Form pursuant to this paragraph, such holder shall be deemed to have elected the option under paragraph (g)(i). Notwithstanding any provision to the contrary, holders of Chauvco Common Shares who are not residents of Canada for the purposes of the Canadian Tax Act will not be entitled to receive Exchangeable Shares under paragraph (g)(ii). Each holder of Chauvco Common Shares who, prior to the Election Deadline, returns to Chauvco a duly completed Letter of Transmittal and Election Form (containing a declaration of residency status) shall be treated as a resident shareholder or non-resident shareholder, as applicable, in accordance with his declaration. Any holder of Chauvco Common Shares who does not complete such declaration by the Election Deadline and who has an address on the register of holders of Chauvco Common Shares which is outside of Canada shall be deemed to be a non-resident shareholder; (i) upon the transfer of shares referred to in paragraph (g) above: (i) each holder of a Chauvco Common Share shall cease to be such a holder, shall have his name removed from the register of holders of Chauvco Common Shares and shall become a holder of the number of fully paid CRI Shares and Exchangeable Shares and/or shares of Pioneer Common Stock to which he is entitled as a result of the transfer of shares referred to in paragraph (g) and such holder's name shall be added to the register of holders of such securities accordingly; and (ii) Pioneer Canada shall become the legal and beneficial owner of all of the Chauvco Common Shares so transferred; (j) holders of Chauvco Common Shares who are residents of Canada for the purposes of the Canadian Tax Act and who have elected to receive Exchangeable Shares under paragraph (g)(ii) shall be entitled to make an income tax election pursuant to subsection 85(1) of the Canadian Tax Act with respect to the transfer of their Chauvco Common Shares to Pioneer Canada by providing two signed copies of the necessary election forms to Pioneer Canada within 90 days following the Effective Date, duly completed with the details of the number of shares transferred and the applicable agreed amounts for the purposes of such election. 35 45 Thereafter, subject to the election forms complying with the provisions of the Canadian Tax Act, the forms will be signed by Pioneer Canada and returned to such holders of Chauvco Common Shares for filing with Revenue Canada, Customs, Excise and Taxation; and (k) Pioneer Canada shall be continued as a corporation under the ABCA. Pursuant to the Arrangement, the Exchange Ratio means in respect of Exchangeable Shares or Pioneer Common Stock to be delivered upon the transfer of Chauvco Common Shares or Chauvco Options to Pioneer Canada, a ratio of the number of Exchangeable Shares or shares of Pioneer Common Stock per Chauvco Common Share or Chauvco Option equal to: (a) if the Pioneer Stock Price is less than $33.50, .493827; (b) if the Pioneer Stock Price is at least $33.50 but less than $39.01, .493827 - ((Pioneer Stock Price - 33.50) X .042360) 5.51 and (c) if the Pioneer Stock Price is equal to or greater than $39.01, .451467. The Exchange Ratio as so determined in each case shall be rounded to six decimal places. The Pioneer Stock Price shall mean the average closing sales price, regular way, per share of the Pioneer Common Stock on the NYSE as reported in the Wall Street Journal over the 10 consecutive trading days ending on the third day next preceding the date of the Chauvco Meeting. Notwithstanding the foregoing, if the Exchange Ratio is above .465116, Pioneer may elect to cause Pioneer Canada to deliver, in lieu of Exchangeable Shares and shares of Pioneer Common Stock, a number of Exchangeable Shares or shares of Pioneer Common Stock for each Chauvco Common Share or Chauvco Option based on the Exchange Ratio as set forth above equal to .465116 and an amount in cash (in Canadian dollars) per Chauvco Common Share or Chauvco Option equal to the product of (x) the Pioneer Stock Price multiplied by the noon spot rate of exchange of U.S. dollars to Canadian dollars announced by the Bank of Canada on the day preceding the date of calculation (the "Currency Exchange Rate") and (y) Exchange Ratio -- .465116 (the "Cash Payment"). Chauvco determined that the fair market value of the Gabon Securities to Chauvco on September 3, 1997 was approximately $47.9 million relying on (i) the bidding process in connection with the sale of Chauvco, (ii) the reserve and evaluation reports prepared by Chauvco's independent engineers, (iii) the review and recommendation of Chauvco's senior management which established a range of values at various discount factors and an assessment of the exploration and development potential of the applicable properties, and (iv) an independent appraisal obtained to confirm and support the allocation to the CRI Shares of a portion of the consideration received by the Chauvco Shareholders. The fair market value of the Gabon Securities to Chauvco on the Effective Date shall be revalued and determined by Chauvco using consistent principles. Notwithstanding the determination of the fair market value of the Gabon Securities to Chauvco on the Effective Date pursuant to the foregoing, unless Chauvco and Pioneer otherwise agree, the Combination Agreement provides that the amount which will be payable by CRI for the Gabon Securities may not exceed $100 million. As a result, immediately following the Effective Time, Chauvco will be wholly-owned by Pioneer Canada and former holders of Chauvco Common Shares and Chauvco Options will hold shares of Pioneer Common Stock and Exchangeable Shares, or a combination thereof, and CRI Shares. As noted above, at the Effective Time, each Chauvco Common Share and Chauvco Option will automatically be transferred to Pioneer Canada for the applicable consideration. Enclosed with copies of this Joint Proxy Statement delivered to the registered holders of Chauvco Common Shares and to the Chauvco Optionholders are the Letter of Transmittal and Election Form or Option Letter of Transmittal and Election Form, which when duly completed and returned together with all required share certificates and payments will enable the holder to receive the consideration to which such holder is entitled. See "-- Procedures for Exchange by Chauvco Shareholders and Chauvco Optionholders." 36 46 The Exchangeable Shares are subject to adjustment or modification in the event of a stock split or other changes to the capital structure of Pioneer so as to maintain the initial one-to-one ratio between the Exchangeable Shares and Pioneer Common Stock. Exchange and Call Right. Holders of the Exchangeable Shares will be entitled at any time following the Effective Time to retract (i.e., require Pioneer Canada to redeem) any or all such Exchangeable Shares owned by them and to receive an equivalent number of shares of Pioneer Common Stock plus an additional amount equivalent to all declared and unpaid dividends on such Exchangeable Shares. Holders of the Exchangeable Shares may effect such retraction by presenting a certificate or certificates to Pioneer Canada or its transfer agent representing the number of Exchangeable Shares the holder desires to retract together with a duly executed statement in the form of Exhibit A to the Exchangeable Share Provisions or in such other form as may be acceptable to Pioneer Canada (the "Retraction Request") specifying the number of Exchangeable Shares the holder wishes to retract and the date upon which the holder desires to receive the Pioneer Common Stock, which must be between three and 10 business days after the request is received by Pioneer Canada (the "Retraction Date"), and such other documents as may be required to effect the retraction of the Exchangeable Shares. Upon receipt of the Exchangeable Shares, the Retraction Request and other required documentation from the holder thereof, Pioneer Canada must immediately notify Pioneer of such Retraction Request. Pioneer will thereafter have two business days in which to exercise a call right (the "Retraction Call Right") to purchase all of the Exchangeable Shares submitted by the holder thereof by the delivery of an equivalent number of shares of Pioneer Common Stock plus an additional amount equivalent to the full amount of all declared and unpaid dividends on the Exchangeable Shares to the transfer agent for delivery to such holder on the Retraction Date. In the event Pioneer determines not to exercise its Retraction Call Right and provided that the Retraction Request is not revoked in accordance with the Exchangeable Share Provisions, Pioneer Canada is obligated to deliver to the holder the number of shares of Pioneer Common Stock equal to the number of Exchangeable Shares submitted by the holder for retraction and payment of an additional amount equivalent to the full amount of all declared and unpaid dividends on such Exchangeable Shares by the Retraction Date. Subject to applicable law and the Redemption Call Rights of Pioneer described below, on the Automatic Redemption Date (which will be on the fifth anniversary date of the first issuance of Exchangeable Shares or, in certain cases at the option of Pioneer, after the third anniversary of such issuance), Pioneer Canada must redeem all but not less than all of the then outstanding Exchangeable Shares in exchange for an equal number of shares of Pioneer Common Stock, plus an additional amount equivalent to the full amount of all declared and unpaid dividends on such Exchangeable Shares. Notwithstanding any proposed redemption of the Exchangeable Shares of Pioneer Canada, Pioneer will have the overriding right to purchase on the Automatic Redemption Date all but not less than all of the then outstanding Exchangeable Shares in exchange for one share of Pioneer Common Stock for each such Exchangeable Share, plus an additional amount equivalent to the full amount of all declared and unpaid dividends on such Exchangeable Share. Pioneer Canada shall, at least 120 days before the Automatic Redemption Date, provide the registered holders of Exchangeable Shares with written notice of the proposed redemption or purchase of the Exchangeable Shares by Pioneer Canada or Pioneer, as the case may be. For a more detailed description of the Exchange Rights and the Call Rights (each as defined herein) in connection with the Exchangeable Shares, see "Description of Capital Stock - -- Pioneer Canada Share Capital -- Exchangeable Shares of Pioneer Canada," "-- Voting and Exchange Trust Agreement -- Exchange Rights" and "-- Call Rights." Effect of Call Right Exercise. If Pioneer exercises one or more of its Call Rights, it will directly issue shares of Pioneer Common Stock to holders of Exchangeable Shares and will become the holder of such Exchangeable Shares. Pioneer will not be entitled to exercise any voting rights attached to the Exchangeable Shares it so acquires. If Pioneer declines to exercise its Call Rights when applicable, it will be required, pursuant to the Support Agreement, to issue Pioneer Common Stock to Pioneer Canada which will, in turn, transfer such stock to the holders of Exchangeable Shares in consideration for the return and cancellation of such Exchangeable Shares. The tax consequences resulting from Pioneer's exercise of one or more of the Call Rights are discussed in "Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders -- 37 47 Canadian Federal Income Tax Considerations," which includes a discussion on deemed dividends and Part VI.1 tax. Voting, Dividend and Liquidation Rights of Holders of Exchangeable Shares. On the Effective Date, Pioneer, Pioneer Canada and Montreal Trust Company of Canada (the "Trustee") will enter into the Voting and Exchange Trust Agreement in the form attached hereto as Annex I. Pursuant to the terms of the Voting and Exchange Trust Agreement, Pioneer will on the Effective Date deposit with the Trustee the one share of Pioneer Special Voting Stock, par value $0.01 per share, to be issued by Pioneer and deposited with the Trustee pursuant to the Voting and Exchange Trust Agreement (the "Voting Share"), which will entitle the Trustee to a number of votes equal to the number of Exchangeable Shares outstanding from time to time that are not held by Pioneer or entities controlled by Pioneer. With respect to any matter as to which holders of shares of Pioneer Common Stock are entitled to vote, each holder of an Exchangeable Share will have the right to instruct the Trustee as to the manner of voting for one of the votes comprising the Voting Share for each Exchangeable Share owned by such holder (the "Voting Rights"). See "Description of Capital Stock -- Voting and Exchange Trust Agreement -- Voting Rights." Upon the occurrence of a Pioneer Canada Insolvency Event (as defined herein), holders of the Exchangeable Shares will have preferential rights to receive from Pioneer one share of Pioneer Common Stock for each Exchangeable Share they hold, plus an additional amount equivalent to the full amount of any declared and unpaid dividends on each such Exchangeable Share. In the event of a proposed Pioneer Canada Insolvency Event, Pioneer will have the right to purchase all of the outstanding Exchangeable Shares from the holders thereof at the effective time of any such liquidation, dissolution, or winding up in exchange for one share of Pioneer Common Stock for each such Exchangeable Share, plus an additional amount equivalent to the full amount of all declared and unpaid dividends on such Exchangeable Share. Upon the occurrence of a Pioneer Liquidation Event (as defined herein), in order for the holders of the Exchangeable Shares to participate on a pro rata basis with the holders of Pioneer Common Stock, each holder of Exchangeable Shares will automatically receive in exchange therefor an equivalent number of shares of Pioneer Common Stock, plus an additional amount equivalent to the full amount of any declared and unpaid dividends on such Exchangeable Shares. For a more detailed description of the Exchange Rights and the Call Rights in connection with the Exchangeable Shares, see "Description of Capital Stock -- Voting and Exchange Trust Agreement." Support Agreement. On the Effective Date, Pioneer and Pioneer Canada will enter into a support agreement (the "Support Agreement") in the form attached hereto as Annex H, whereby Pioneer will make certain covenants to Pioneer Canada regarding the Exchangeable Shares. In the Support Agreement, Pioneer will covenant as follows: (i) Pioneer will not declare or pay dividends on the Pioneer Common Stock unless Pioneer Canada is able to and simultaneously pays an equivalent dividend on the Exchangeable Shares; (ii) Pioneer will cause Pioneer Canada to declare and pay an equivalent dividend on the Exchangeable Shares simultaneously with Pioneer's declaration and payment of dividends on the Pioneer Common Stock; (iii) Pioneer will advise Pioneer Canada in advance of the declaration of any dividend on the Pioneer Common Stock and ensure that the declaration date, record date and payment date for dividends on the Exchangeable Shares are the same as that for the Pioneer Common Stock; (iv) Pioneer will take all actions and do all necessary things to ensure that Pioneer Canada is able to pay to the holders of the Exchangeable Shares the equivalent number of shares of Pioneer Common Stock in the event of a liquidation, dissolution or winding-up of Pioneer Canada, delivery of a Retraction Request by a holder of Exchangeable Shares, or a redemption of Exchangeable Shares by Pioneer Canada; and (v) Pioneer will not vote or otherwise take any action or omit to take any action causing the liquidation, dissolution or winding-up of Pioneer Canada. In order for Pioneer to perform in accordance with the Support Agreement, Pioneer Canada must notify Pioneer of the occurrence of certain events, such as the liquidation, dissolution or winding-up of Pioneer Canada and Pioneer Canada's receipt of a Retraction Request from a holder of Exchangeable Shares. See "Description of Capital Stock -- Support Agreement." 38 48 THE COMBINATION AGREEMENT Representations, Warranties and Covenants. The Combination Agreement contains certain customary representations and warranties of each of Chauvco and Pioneer relating to, among other things, their respective organization, capital structures, qualification, operations, financial condition, compliance with necessary regulatory or governmental authorities and other matters, including their authority to enter into the Combination Agreement and to consummate the Transaction. Pursuant to the Combination Agreement, each party has covenanted that, until the earlier of the termination of the Combination Agreement or the Effective Time, it will maintain its business, it will not take certain actions outside the ordinary course without the other's consent and it will use its commercially reasonable efforts to consummate the Transaction. The parties have also agreed to advise each other of material changes and to provide the other with interim financial information. Further, the parties have agreed to apply for and use their commercially reasonable efforts to obtain all regulatory and other consents and approvals required for the consummation of the Transaction, to use their commercially reasonable efforts to effect the Transaction, including the preparation and mailing of this Joint Proxy Statement, and to provide the other party and their respective counsel with such information as they may reasonably request. Pioneer agreed that all rights to indemnification under the ABCA and under the charter documents and bylaws of Chauvco and its subsidiaries for directors and officers of Chauvco will survive the Arrangement and remain in full force and effect. Pioneer agreed to use its commercially reasonable best efforts to cause the Exchangeable Shares to be listed on the TSE as of the Effective Date. Chauvco has agreed to take such action as may be necessary so that the Chauvco shareholder rights plan shall be waived immediately prior to the Effective Time and not apply to the transactions contemplated herein. Chauvco shall utilize its best efforts to keep the Chauvco shareholder rights plan in full force and effect unamended until such waiver. The Combination Agreement also provides that, unless and until the agreement is terminated in accordance with the provisions thereof, Chauvco will not (and it shall cause its directors, representatives, agents or affiliates not to) take or cause to take (or cause any Chauvco subsidiaries to take), directly or indirectly, any of the following actions with a party other than Pioneer and its designees: (i) solicit, encourage, initiate or participate in any negotiations, inquiries or discussions with respect to any offer or proposal to acquire in any manner, directly or indirectly, all or a significant part of the business or assets of Chauvco or more than 25% of the voting power of the Chauvco Common Shares (each of the foregoing, an "Acquisition Transaction"); (ii) furnish or provide any information with respect to, or otherwise take any action that facilitates, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to any inquiry, offer or proposal for, an Acquisition Transaction; (iii) enter into or execute any agreement or arrangement relating to an Acquisition Transaction; or (iv) make or authorize any public statement, recommendation or solicitation with respect to any Acquisition Transaction or any offer or proposal relating to an Acquisition Transaction. Notwithstanding the foregoing agreements of Chauvco, prior to the approval of the Combination Agreement and the Arrangement by the holders of Chauvco Common Shares at the Chauvco Meeting, the Combination Agreement does not prevent the Chauvco Board from: (i) engaging in discussions or negotiations with (but not soliciting or initiating such discussions or negotiations or encouraging inquiries from) a party concerning an unsolicited Acquisition Transaction; or (ii) providing non-public information in connection with an unsolicited Acquisition Transaction that has previously been provided to Pioneer, in each case if the Chauvco Board first determines that such action is required by reason of the fiduciary duties of the members of the Chauvco Board to Chauvco or to the Chauvco Shareholders under applicable law and that such unsolicited Acquisition Transaction involves consideration superior to the consideration provided for in the Combination Agreement, provided that Chauvco first notifies Pioneer of the determination by the board of directors of Chauvco and further notifies that it is furnishing information to or entering into discussions or negotiations with a party and keeps Pioneer informed of the status (including all terms and conditions thereof but not the identity of such person or entity) of such discussions or negotiations. In no event may the Chauvco Board or any committee thereof withdraw or modify, or propose to withdraw or modify, in a manner adverse to Pioneer, the approval and recommendation by such board of directors or such committee of the Combination Agreement, the Plan of Arrangement or the Arrangement, or approve or recommend, or propose to approve or recommend, any Acquisition Transaction except in the case of a Superior Proposal. A "Superior Proposal" means a bona fide written offer for an Acquisition Transaction to 39 49 acquire, directly or indirectly, for consideration consisting of cash and/or securities, more than 50% of the shares and/or voting power of the Chauvco Common Shares then outstanding or all or substantially all the assets of Chauvco, and is otherwise on terms which the Chauvco Board determines to be more favorable to Chauvco than the Arrangement for which financing is committed or in the judgment of the Chauvco Board is reasonably capable of being financed by such third party and for which such proposed transaction is reasonably likely to be consummated without undue delay. Disposition of Chauvco's Interest in Gabon and other International Assets. The Combination Agreement provides that, in connection with the transactions leading to the distribution of the CRI Shares in accordance with the Arrangement, the purchase and sale agreement between CR and CRI with respect to the transfer of CR's interest in the Gabon Securities to CRI shall be in a form mutually acceptable to Chauvco and Pioneer Canada and shall provide that: (i) CRI will assume and be responsible for and will indemnify, defend and hold CR, Chauvco and Pioneer Canada harmless from and against any liabilities that CR, Chauvco or Pioneer Canada may be or become subject to if any taxing authority challenges the value placed on the Gabon Securities or the corresponding value of the CRI Shares transferred to the Chauvco Shareholders and Chauvco Optionholders; (ii) CRI will assume all liabilities with respect to the underlying operations of the Gabon Subsidiaries being purchased; (iii) CRI will assume and be responsible for and will indemnify, defend and hold CR, Chauvco and Pioneer Canada harmless from and against any liabilities that CR, Chauvco and Pioneer Canada may be or become subject to which relate to the assets, business, operations, debts or liabilities of CR and Chauvco which are being purchased by CRI and with respect to the transactions contemplated in respect thereof (provided that with respect to tax matters, the extent of the indemnity shall be limited to that set out in (i)); (iv) CR and Chauvco will assume and be responsible for and will indemnify, defend and hold CRI harmless from and against any liabilities CRI may be or become subject to which relate to the assets, business, operations, debts or liabilities of CR and Chauvco which are not being purchased by CRI; (v) Chauvco, subject to confidentiality provisions, will retain copies of the books and records of such companies; (vi) the Chauvco name shall not be used in connection with, and CRI shall not engage in, any oil and gas operations in the western Canadian sedimentary basin for a period of one (1) year from the Effective Date; and (vii) CRI will use its best efforts to have Chauvco released from any and all guarantees Chauvco has given to the Gabonese Government. In addition, Chauvco will provide an additional C$13.5 million of funding into the Gabon Subsidiaries through CR between September 3, 1997 and the Effective Date which shall remain in the Gabon Subsidiaries for their operations and shall not be repaid to CR except to the extent that the same may be reflected in the determination of the fair market value of the Gabon Securities on the Effective Date. Disposition of Chauvco's Interest in Alliance Pipeline Project. The Alliance pipeline project (the "Alliance Pipeline Project" or "Alliance") involves the design, construction and operation of a mainline natural gas pipeline from northwestern Alberta and northwestern British Columbia to several delivery points near Chicago, Illinois. In addition, the Alliance Pipeline Project includes the construction and operation of lateral pipelines and related facilities in Alberta and British Columbia and the construction and operation of a plant to be located in Illinois which will be capable of extracting liquids. The Combination Agreement provides that, on or prior to the Effective Time, Chauvco shall enter into a transaction causing all of its rights and assets relating to the Alliance Pipeline Project to be distributed to or through an entity for a cash payment to Chauvco of C$13.5 million (plus any amounts funded by Chauvco after September 3, 1997 for regular capital needs and commitments). Chauvco currently anticipates that it will convey its approximate 20% interest in the Alliance Pipeline Project prior to the Effective Time to various entities owned directly or indirectly by a limited partnership formed under the laws of the Province of Alberta (the "Partnership"). Chauvco shall be entitled to provide funding and commitments in respect of the regular capital funding and commitments of the Alliance Pipeline Project up to Closing provided that such funding shall be repaid, and such commitments shall be assumed, by the new Alliance entity on or before the Effective Time. Chauvco shall not be entitled to commit to provide any additional funding to the Alliance Pipeline Project other than in respect of such regularly scheduled capital commitments (and shall notify Pioneer as and when such funding or commitments are provided) and, in particular, Chauvco shall not be entitled to commit to the approximate $260 million equity financing commitment due in October, 1997. The purchase and sale 40 50 agreement between the new Alliance entity and Chauvco with respect to the transfer of Chauvco's interest in the Alliance Pipeline Project to the new Alliance entity will be in a form mutually acceptable to Chauvco and Pioneer and provide that (i) the new Alliance entity will assume and be responsible for and will indemnify, defend and hold harmless Chauvco from and against any liabilities, including any tax liabilities, Chauvco may be or become subject to which relate in any manner whatever to the transfer of Chauvco's interest in the Alliance Pipeline Project to the new Alliance entity and with respect to the transactions contemplated in connection therewith, (ii) Chauvco will assume and be responsible for and will indemnify, defend and hold harmless the new Alliance entity from and against any liabilities the new Alliance entity may be or become subject to which relate to the assets, business, debts and liabilities of Chauvco unrelated to the Alliance Pipeline Project, and (iii) Chauvco, subject to confidentiality provisions, will retain copies of the books and records relating to Chauvco's interest in the Alliance Pipeline Project. Chauvco intends to issue rights ("Chauvco Rights") to the Chauvco Shareholders of record and resident in Canada on a date to be determined. One Chauvco Right will be issued for each Chauvco Common Share. One Chauvco Right and payment of the exercise price will entitle a Chauvco Shareholder to receive one unit of the Partnership. The proceeds from the rights offering will be used by Chauvco to acquire units of the Partnership which Chauvco will contemporaneously distribute to those Chauvco Shareholders who have exercised their Chauvco Rights. The Partnership will use the proceeds from the issuance of the units to purchase Chauvco's interest in the Alliance Pipeline Project and to meet its future capital commitments to the Alliance Pipeline Project. Chauvco Shareholders who fully exercise their Chauvco Rights will be entitled to subscribe, on a pro rata basis, for additional units available as a result of Chauvco Rights not being exercised. Chauvco Shareholders who are not resident of Canada will not be entitled to participate in the rights offering. The Chauvco Rights otherwise issuable to such shareholders will be sold by a trustee and the sales proceeds (less applicable brokerage fees and withholding taxes) will be paid to non-resident shareholders. Arrangements will be made to provide Chauvco Optionholders with the ability to acquire units of the Partnership. The Partnership may sell special warrants ("Special Warrants") to certain investors which may include Chauvco Shareholders prior to the closing of the rights offering. The Special Warrants will entitle the holders thereof to acquire units of the Partnership for no additional consideration on the basis of one unit for each Special Warrant. The number of units which Chauvco Shareholders who purchase Special Warrants will be entitled to receive upon the exercise of the Special Warrants will be equal to the number of units that such Chauvco Shareholders would have been entitled to receive had they exercised their initial Chauvco Rights under the rights offering. The Chauvco Shareholders who purchase Special Warrants will agree not to exercise or sell the Chauvco Rights which they will receive under the rights offering, but will be entitled to subscribe for additional units of the Partnership that are not subscribed for by other Chauvco Shareholders on the same basis as the remaining Chauvco Shareholders. Chauvco and the Partnership have filed a preliminary prospectus with Canadian securities commissions to qualify the Chauvco Rights and the units of the Partnership issuable upon the exercise of the Chauvco Rights and the Special Warrants. A final prospectus will be mailed to Chauvco Shareholders prior to the Chauvco Meeting. Conditions to Closing. The Combination Agreement provides that the respective obligations of each party to complete the Transaction are subject to a number of conditions, including the following material conditions: (a) the Arrangement shall have been approved and adopted by the required vote of the holders of Chauvco Common Shares; (b) the issuance of Pioneer Common Stock upon the exchange of the Exchangeable Shares contemplated by the Combination Agreement shall have been approved by the holders of Pioneer Common Stock; (c) all consents, including the Final Order and any other regulatory approvals, that are legally required for the consummation of the Transaction shall have occurred, been filed or been obtained; (d) no order, decree or ruling or statute, rule, regulation or order shall be threatened, enacted, entered or enforced by any governmental agency that prohibits or renders illegal the consummation of the Transaction; (e) there shall be no temporary restraining order, preliminary injunction, permanent injunction or other order preventing the consummation of the Transaction issued by any Canadian or U.S. federal, provincial or state court remaining in effect, nor shall any proceeding seeking any of the foregoing be pending; (f) the representations and warranties of the parties shall be true and correct in all material respects as of the 41 51 Effective Time as though made at and as of the Effective Time; (g) the parties shall have performed in all material respects all agreements and covenants to be performed by them under the Combination Agreement; (h) the parties shall have received legal opinions dated as of the Closing Date as to matters customary to transactions of the type contemplated by the Combination Agreement; (i) Mr. James Baroffio shall have been elected to the Pioneer Board (a condition precedent to Chauvco's obligations only) (Mr. Guy J. Turcotte shall, in addition, be nominated as a director of Pioneer for election at Pioneer's 1998 annual stockholder's meeting) (see "-- Interests of Certain Persons in the Transaction"); (j) the Pioneer Common Stock issuable pursuant to the Arrangement and upon exchange of the Exchangeable Shares shall have been approved for listing on the NYSE and the Exchangeable Shares shall have been approved for listing on the TSE (a condition precedent to Chauvco's obligations only); (k) holders of no more than 5% of the Chauvco Common Shares shall have notified Chauvco of their intention to dissent from the Arrangement and the transactions contemplated thereby (a condition precedent to Pioneer's obligations only); and (l) there shall have been no event, change or effect on or prior to the Effective Date resulting in a material adverse effect on either Chauvco or Pioneer (a condition precedent to the other parties' obligations only). Whether before or after the requisite approval by the Pioneer Stockholders or the Chauvco Shareholders, the Combination Agreement may be terminated by written notice by the terminating party to the other party hereto at any time prior to the Effective Time, as follows: (a) by the mutual agreement of the parties; (b) by either Chauvco or Pioneer in the event of a breach by the other party of any representation, warranty, covenant or other agreement contained in the Combination Agreement which has not been cured within 15 days after written notice thereof (except that no cure period shall be provided for a matter which by its nature cannot be cured and in no event shall such cure period extend beyond the Termination Date, as defined below) provided that the party purporting to terminate the Combination Agreement is not itself in material breach of any representation, warranty, covenant or other agreement contained in the Combination Agreement; (c) by Chauvco if the stockholders of Pioneer do not approve the issuance of Pioneer Common Stock issuable upon exchange of the Exchangeable Shares or any other matters related to the Plan of Arrangement requiring their approval at the Pioneer Meeting; (d) by Pioneer if the Chauvco Shareholders do not approve the Plan of Arrangement at the Chauvco Meeting; (e) by either party, if such party's conditions precedent under the Combination Agreement have not been satisfied or waived on or before 5:00 p.m. (Calgary, Alberta time) on March 31, 1998 (the "Termination Date"), other than as a result of a breach of the Combination Agreement by the terminating party; and (f) by Chauvco prior to obtaining the approval of the Chauvco Shareholders of the Plan of Arrangement, if: (i) the Chauvco Board has determined that, it is necessary in order to comply with its fiduciary duties to Chauvco or the Chauvco Shareholders under applicable law, to enter into an agreement with respect to or to consummate a transaction constituting a Superior Proposal, (ii) Chauvco has given notice to Pioneer that Chauvco has received a Superior Proposal from a third party and intends to terminate the Combination Agreement and (iii) either Pioneer has not revised its take-over proposal within five business days after such notice or if Pioneer has revised its take-over proposal, the Chauvco Board has determined that the third party's Acquisition Transaction is superior to Pioneer's revised take-over proposal; provided that Chauvco may not effect such termination without tendering the fee indicated below. The Combination Agreement provides that termination fees are payable as follows: (i) if the Combination Agreement is terminated by Chauvco pursuant to item (c) above, a fee of C$25 million shall be paid by Pioneer to Chauvco; (ii) if the Combination Agreement is terminated by Pioneer pursuant to item (d) above, a fee of C$25 million shall be paid by Chauvco to Pioneer; (iii) if the Combination Agreement is terminated by Chauvco pursuant to item (f) above, a fee of C$40 million shall be paid by Chauvco to Pioneer; and (iv) if the Combination Agreement is terminated by Pioneer pursuant to item (d) above and within 6 months of such termination definitive documentation with respect to an Acquisition Transaction has been entered into or 50% or more of the outstanding Chauvco Common Shares have been acquired pursuant to a tender offer made as an Acquisition Transaction, then Chauvco shall pay to Pioneer, in addition to the fee contemplated in item (ii) above, a fee of C$15 million contemporaneously with the closing of such Acquisition Transaction. 42 52 OTHER AGREEMENTS Shareholders Agreements. Chauvco and Pioneer have entered into agreements with certain holders of Chauvco Common Shares (Trimac Corporation, Gendis Inc. and Guy J. Turcotte) and Pioneer Common Stock (Richard E. Rainwater, Scott D. Sheffield and I. Jon Brumley) pursuant to which such holders have agreed, at the Chauvco Meeting and the Pioneer Meeting, respectively, to vote their securities in favor of the proposals to be brought before such meetings. In addition, such holders have agreed to vote against any proposal that might materially adversely affect the Transaction. Such Chauvco shareholders collectively own approximately 48% of the outstanding Chauvco Common Shares and such Pioneer stockholders collectively own approximately 14% of the outstanding Pioneer Common Stock. Affiliates Agreements. Rule 145 promulgated under the Securities Act regulates the disposition in the United States of securities by "affiliates" of Chauvco in connection with the Arrangement. Chauvco and Pioneer have entered into agreements (the "Chauvco Affiliates Agreements") with each of the Chauvco Affiliates, pursuant to which such persons have agreed that they will not sell, pledge or otherwise dispose of any Exchangeable Shares or Pioneer Common Stock, respectively, unless: (a) such transaction is permitted pursuant to the provisions of Rule 145 under the Securities Act; (b) a registration statement covering the transaction shall have been filed with the SEC and made effective under the Securities Act, or (c) in the opinion of counsel reasonably acceptable to Pioneer, is otherwise exempt from registration under the Securities Act. COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE TRANSACTION An arrangement of a corporation under the ABCA requires approval by both the Court and the securityholders of the subject corporation. Prior to the mailing of this Joint Proxy Statement, Chauvco obtained the Interim Order providing for the calling and holding of the Chauvco Meeting and other procedural matters. A copy of the Interim Order is attached hereto as Annex D. The Notice of Petition for the Final Order appears at the front of this Joint Proxy Statement. Subject to the approval of the Arrangement by the Chauvco Shareholders at the Chauvco Meeting, the hearing in respect of the Final Order is scheduled to take place on , 1997 at (Calgary time) in the Court at the Court House, 611 4th Street S.W., Calgary, Alberta, Canada. All Chauvco Shareholders and Chauvco Optionholders who wish to participate or be represented or to present evidence or arguments at that hearing must serve and file a notice of appearance as set out in the Notice of Petition for the Final Order and satisfy any other requirements. At the hearing of the Application in respect of the Final Order, the Court will consider, among other things, the fairness and reasonableness of the Arrangement. The Court may approve the Arrangement as proposed or as amended in any manner the Court may direct, subject to compliance with such terms and conditions, if any, as the Court deems fit. Assuming the Final Order is granted and the other conditions to the Combination Agreement are satisfied or waived, it is anticipated that the following will occur substantially simultaneously: Articles of Arrangement will be filed with the Registrar under the ABCA to give effect to the Arrangement, the Support Agreement and the Voting and Exchange Trust Agreement will be executed and delivered, and the various other documents necessary to consummate the transactions contemplated under the Combination Agreement will be executed and delivered. Subject to the foregoing, it is presently anticipated that the Effective Time will occur on or about , 1997. BACKGROUND OF THE TRANSACTION The proposed Transaction predates the formation of Pioneer and has its genesis in expansion plans held by one of Pioneer's predecessor companies, Parker & Parsley. Parker & Parsley had been actively considering international expansion as early as 1994 and had performed a number of evaluations and entertained a few preliminary negotiations. During this time, Parker & Parsley began refining its expansion focus toward the Western Hemisphere and began to pursue combinations with producers that owned assets in Canada and South America. 43 53 During this period, Mr. Sheffield frequently attended industry conferences, made presentations on Parker & Parsley, gathered information on other companies and met with other oil and gas executives. Mr. Sheffield and other executives attended a particular conference in September 1995 and met Mr. Turcotte of Chauvco at a conference activity. The two exchanged general information regarding their respective companies, views about the future prospects and trends in the oil and gas industry. At that time Mr. Sheffield became impressed with the track record of Chauvco's management and the assets and operations of Chauvco. Upon returning from the conference, Mr. Sheffield apprised members of Parker & Parsley's business development group of the meeting who then began to assimilate a compilation of public information and to perform a preliminary evaluation. Informal discussions were held between the companies at that time regarding matters of common interest related to international projects. Over the next several years, Parker & Parsley consummated a number of acquisitions, divestitures and financial transactions as it continued to implement its growth strategy. Included in these activities were discussions relating to the Parker/Mesa Merger, the negotiations of which began in the late fall of 1996. Also at this time, Chauvco became concerned that the trading price of the Chauvco Common Shares did not reflect the significant growth potential and value of its three existing core operating areas in Canada, Argentina and Gabon, and its other investment opportunities, such as its interest in the Alliance Pipeline Project. Additionally, Chauvco's two major shareholders were restructuring their operations and investments in order to maximize value for their shareholders. In February 1997, the Chauvco Board adopted a Shareholders Rights Plan designed to encourage fair treatment of shareholders if there was to be an unsolicited takeover bid for Chauvco. Preliminary discussions were also initiated with Salomon Brothers and RBC DS regarding a strategic alternatives review process to enhance shareholder value. Between February and May 1997, Chauvco's executive management and its financial advisors held extensive discussions regarding options to maximize shareholder value, including a process and timing review, and transaction structuring alternatives. Confidential evaluation materials were also organized in anticipation of opening data rooms. In March 1997, a senior member of Salomon Brothers' investment banking group contacted Pioneer about Chauvco and generally discussed a preliminary timetable for the strategic alternatives review, as well as briefly describing the goal of the process and inquired as to Parker & Parsley's interest. Parker & Parsley responded that it would be interested but that other projects might hinder its ability to participate; nevertheless, Parker & Parsley reinitiated its preliminary evaluation of Chauvco's properties, utilizing only updated publicly available information. Pioneer had no contact with Chauvco personnel at this time. At the same time, the Parker/Mesa Merger negotiations led to the signing of a definitive agreement on April 10, 1997. Also during this time, Chauvco proceeded with its established investment programs on an aggressive "business as usual" basis in order to maintain its shareholder value creation strategy. Chauvco experienced considerable success in all three core operating areas, having a positive impact on its share price. Chauvco's share price rose from the C$14.00 to C$15.00 range in February 1997 to C$19.40 on May 2, 1997, the last trading day before announcement of its strategic alternatives review process. In early May 1997, Chauvco, together with its major shareholder, Gendis Inc., officially announced its intention to pursue strategic alternatives, subsequent to which Parker & Parsley signed a confidentiality agreement and received a Confidential Evaluation Memorandum. After reviewing the Confidential Evaluation Memorandum, at Salomon Brothers' request, Parker & Parsley verbally reiterated its interest in pursuing the proposed transaction, particularly if the transaction could be structured as an exchange of common stock. Parker & Parsley informed Salomon Brothers that its early financial evaluation indicated that Parker & Parsley would be prepared to offer a premium exceeding 30% of the then current Chauvco Common Share price. Based on this conversation, Salomon Brothers invited Parker & Parsley to the Chauvco data room in early June 1997. Thirteen members of Parker & Parsley's senior management team and business development group, including Mr. Sheffield, participated in four and one-half days of data room meetings. One month of 44 54 detailed technical review followed, including numerous further telephone contacts between Parker & Parsley and Salomon Brothers as well as Chauvco. Between May 20 and mid-July 1997 numerous parties executed confidentiality agreements and were invited to Chauvco's data rooms for presentations by Chauvco management and to review confidential material. In mid-July 1997, parties who had been to Chauvco's data rooms were requested to provide proposals. As the timing of the proposed Parker/Mesa Merger became clearer and members of Parker & Parsley's senior management were chosen, a meeting was held in early July 1997 to brief the members of Parker & Parsley's management committee regarding the results to date of the technical review and related due diligence. At that time, the management committee decided that, in light of the analysis presented and current circumstances, Parker & Parsley would be willing to offer a premium of 25% to 35% to the then current trading price of Chauvco Common Shares, which at that time was approximately C$20.50 per share. Following the meeting, a representative of Parker & Parsley communicated this decision verbally to representatives of Salomon Brothers, who encouraged Parker & Parsley to proceed in the process. At the same time, several areas of technical, financial and legal due diligence that would be required by Parker & Parsley during the next several weeks were discussed. Parker & Parsley continued to refine its analysis, particularly with respect to the Canadian assets of Chauvco, and several trips to both Calgary and Buenos Aires, including direct meetings with Chauvco personnel, were initiated for this purpose. During this period, discussions between Parker & Parsley and representatives of Salomon Brothers continued and principally concerned the timing of proposals and the possible use of Pioneer Common Stock as a viable currency for a business combination. In addition, Salomon Brothers and Parker & Parsley held discussions in mid-July regarding the valuation and prospects for the international oil and gas assets held by Chauvco outside of Canada and Argentina, principally in Gabon, as well as the potential Alliance Pipeline Project. As a result of these discussions, the parties mutually agreed to exclude these assets from future consideration in the transaction being contemplated by Chauvco and Parker & Parsley. The discussions with Salomon Brothers continued to develop and culminated in a request for a presentation to members of Chauvco's senior management and board members about the assets, operations and business prospects of Pioneer and on July 26, 1997 such a meeting was held in Parker & Parsley's office in Midland, Texas with Mr. Turcotte and three other Chauvco representatives receiving presentations from several senior members of Parker & Parsley's management. The next day Parker & Parsley's management committee met again for the purpose of reviewing an updated analysis of Chauvco and to discuss a potential bid for Chauvco particularly in light of the perceived acceptability of Pioneer Common Stock as an acquisition currency. During that meeting the management committee discussed the benefits of a business combination and, specifically, the positive effect of the acquisition on the growth plans of Parker & Parsley, the accretive nature of the acquisition and the potential benefits on the balance sheet of Parker & Parsley. Chauvco's stock price continued to appreciate and Parker & Parsley's management committee began to evaluate a potential offering price that preserved the benefits of the transaction but would represent an attractive price to the Chauvco Shareholders. Parker & Parsley's management committee decided, in light of potential timing concerns related to the pending Parker/Mesa Merger and valuation issues, to suspend pursuit of the transaction with Chauvco, but to present information to the Pioneer Board at the first Pioneer Board meeting to be held on August 8, 1997. On August 7, 1997, the Parker/Mesa Merger was approved, and the Pioneer Board met the following day to consider and approve a number of business items and an abbreviated analysis of a potential acquisition of Chauvco. At that time the Pioneer Board concurred with management's recommendation, pending future developments, not to immediately pursue the Chauvco transaction. On August 15, 1997, representatives of Salomon Brothers contacted Mr. Sheffield and requested a meeting to be held on August 17, 1997 to discuss a potential acquisition of Chauvco by Pioneer. At that meeting representatives of Salomon Brothers proposed that Pioneer acquire Chauvco's North American and South American assets for a minimum of C$24 per Chauvco Common Share and that Chauvco's West 45 55 African properties and interests in the Alliance Pipeline Project be distributed to Chauvco Shareholders. Based on these discussions, Pioneer and Mr. Brumley began to informally poll the members of the Pioneer Board. Representatives of Pioneer and Salomon Brothers then began to negotiate the terms of a letter of intent, but such letter was never executed. After several days of discussion, a set of preliminary terms was established on August 25, 1997, and several members of the management committee went to Calgary to negotiate the terms of the Combination Agreement and related documents. At this time, Pioneer hired Goldman Sachs to undertake a study to enable it to render its opinion with respect to the fairness of the consideration to be paid by Pioneer in its proposed acquisition of all of the Chauvco Common Shares. On August 29, 1997, the Pioneer Board met to consider the proposed terms of the transaction and agreed to reconvene on September 3, 1997 (where Goldman Sachs made a presentation and delivered its opinion) and subsequently voted. The Pioneer Board met for such purpose and, with one board member abstaining because of a conflict of interest, those directors voting unanimously approved the Combination Agreement and the Transaction. The board member who abstained did so because he was a partner in a law firm that provided services to Chauvco in connection with the Transaction. At a Chauvco Board meeting held on September 3, 1997, the Chauvco Board received a presentation by both Salomon Brothers and RBC DS with respect to the valuation methodology employed in reaching their respective conclusions. RBC DS provided an opinion to the Chauvco Board that the Arrangement is fair from a financial point of view to the Chauvco Shareholders. The Chauvco Board also received an opinion from Salomon Brothers that the Pioneer Common Stock, Exchangeable Shares or combination thereof is fair, from a financial point of view, to the Chauvco Shareholders, as consideration for the Chauvco Common Shares after giving effect to the distribution of the CRI Shares and the issuance of the Chauvco Rights. Copies of Salomon Brothers' and RBC DS' written opinions to the Chauvco Board dated as of September 3, 1997 are attached as Annex K and Annex L to this Joint Proxy Statement. RECOMMENDATION OF PIONEER'S BOARD OF DIRECTORS; REASONS FOR THE TRANSACTION THE PIONEER BOARD APPROVED THE COMBINATION AGREEMENT AND THE TRANSACTION AND RECOMMENDS THAT HOLDERS OF PIONEER COMMON STOCK VOTE IN FAVOR OF THE COMBINATION AGREEMENT AND THE TRANSACTION. The Pioneer Board believes that the terms of the Combination Agreement and the Transaction are fair to and in the best interest of Pioneer and its stockholders, has approved the Combination Agreement and the Transaction and recommends that the Pioneer Stockholders approve the Combination Agreement and the Transaction. In making the determination to recommend approval of the Transaction, the Pioneer Board did not quantify or otherwise attempt to assign relative weights to the specific factors it considered while making its determination. In reaching this determination, the Pioneer Board reviewed presentations from, and discussed the terms and conditions of the Transaction with, Pioneer senior management, representatives of its legal counsel and representatives of Goldman Sachs, its financial advisor. The Pioneer Board considered a number of factors, including those described below. Establishment of New Core Areas. The Pioneer Board considered the opportunities presented by the establishment of two new core areas in western Canada and Argentina, the benefits of owning Canadian oil and gas reserves in terms of the long-term supply and demand dynamics of the North American energy markets, the attractive operating climate in Argentina and the similarity of the reservoir characteristics in Argentina to Pioneer's domestic properties. Production Growth. The Pioneer Board considered that the expected oil and gas production volumes for the Chauvco properties, reinvestment projects and the recent growth in production from the Chauvco properties will accelerate Pioneer's expansion and growth strategies. Reserve Growth Potential. The Pioneer Board considered the projected reserves of the Chauvco properties based on an evaluation by its engineering staff and believes that the complementary nature of the two companies will provide a strong foundation for growth that will benefit the Pioneer Stockholders. 46 56 Accretion to Cash Flow. The Pioneer Board considered that the projected and future results of the Transaction will be accretive to discretionary cash flow by approximately 7% in 1998 and 15% in 1999. Improved Balance Sheet. The Pioneer Board considered that upon consummation of the Transaction, Pioneer's debt to book capitalization ratio will decrease from 46% to 40%, which had been set as a target ratio, and that other credit ratios will approach their targets as well. Management. The Pioneer Board also considered the depth and breadth of management experience of Mr. Turcotte and Mr. Baroffio, who have each agreed to serve on the Pioneer Board if the Transaction is consummated. Both of these individuals have extensive experience and successful track records as builders of oil and gas companies and operations in foreign lands. Combination Agreement. The Pioneer Board considered the terms and conditions of the Combination Agreement, including the consideration to be paid to Chauvco Shareholders and Chauvco Optionholders in the Transaction. The Pioneer Board considered that the Exchange Ratio fluctuates if the average price of Pioneer Common Stock is between $33.50 and $39.01 per share and that, as the average price increases up to $39.01, the Exchange Ratio will decrease. The Pioneer Board also considered the provisions of the Combination Agreement which prohibit Chauvco and its officers, directors, employees, agents, affiliates and other representatives, and those of Chauvco's subsidiaries, from soliciting or encouraging any Acquisition Transaction (as herein defined) or, subject to the fiduciary duties of the Chauvco Board, from engaging in any discussions or negotiations with any third parties with respect to an Acquisition Transaction. The Pioneer Board further considered the provisions of the Combination Agreement which require Chauvco to pay to Pioneer a fee of C$25 million or C$40 million under certain circumstances. Shareholders Agreements. The Pioneer Board considered that Chauvco and Pioneer have entered into agreements with certain holders of Chauvco Common Shares and Pioneer Common Stock pursuant to which such holders have agreed, at the Chauvco Meeting and the Pioneer Meeting, respectively, to vote their securities in favor of the proposals to be brought before such meeting. In addition, such holders have agreed to vote against any proposal that might materially adversely affect the Transaction. Such Chauvco Shareholders collectively own approximately 48% of the outstanding Chauvco Common Shares and such Pioneer Stockholders collectively own approximately 16% of the outstanding Pioneer Common Stock. Fairness Opinion. The Pioneer Board received a presentation from Goldman Sachs at the meeting of the Pioneer Board held on September 3, 1997, and considered the written opinion of Goldman Sachs, rendered on September 3, 1997, that, as of such date and based upon and subject to the factors and assumptions set forth therein, the consideration to be paid by Pioneer pursuant to the Combination Agreement was fair to Pioneer. A copy of Goldman Sachs' written opinion to the Pioneer Board dated as of September 3, 1997 is attached as Annex J to this Joint Proxy Statement. RECOMMENDATION OF CHAUVCO'S BOARD OF DIRECTORS; REASONS FOR THE TRANSACTION THE CHAUVCO BOARD BELIEVES THAT THE ARRANGEMENT IS FAIR AND IN THE BEST INTERESTS OF CHAUVCO AND THE CHAUVCO SHAREHOLDERS, HAS VOTED UNANIMOUSLY TO APPROVE THE ARRANGEMENT AND RECOMMENDS THAT THE CHAUVCO SHAREHOLDERS APPROVE THE ARRANGEMENT. 47 57 In reaching its conclusion, the Chauvco Board reviewed presentations from and discussed the terms and conditions of the Arrangement with: - Chauvco senior management; - representatives of its legal counsel; and - representatives of Salomon Brothers and RBC DS, its financial advisors. The Chauvco Board considered a number of factors, including: - Opinions of Experienced Financial Advisors. Each of Salomon Brothers and RBC DS rendered an opinion to the Chauvco Board to the effect that the consideration to be received by the Chauvco Shareholders in the Transaction is fair to the Chauvco Shareholders from a financial point of view. As part of its review of the consideration, RBC DS considered the opportunity to participate in CRI and the Alliance Pipeline Project and concluded that the combined consideration of the one CRI Share and the opportunity to participate in the Alliance Pipeline Project to be received for each Chauvco Common Share would be in the region of C$3.00 to C$4.50. Copies of Salomon Brothers' and RBC DS's written opinions to the Chauvco Board dated as of September 3, 1997 are attached as Annex K and Annex L to this Joint Proxy Statement. - Evaluations of Interested Parties. Beginning in early May 1997, Chauvco, through its financial advisors, conducted an extensive process to seek industry participants to initiate a transaction to enhance shareholder value. As a result, a large number of interested parties evaluated Chauvco, and the Transaction compared favorably to all other proposals. - Premium to Trading Price. The Transaction provides the Chauvco Shareholders with a significant premium to the trading price of the Chauvco Common Shares immediately preceding the announcement of the Transaction. - Increased Liquidity. The Pioneer Common Stock should provide Chauvco Shareholders with increased liquidity. - Retention of Gabon. Chauvco Shareholders retain the upside of Chauvco in Gabon and other international opportunities by the spinoff of CRI to Chauvco Shareholders through the distribution of the CRI Shares. - Retention of Alliance. Chauvco Shareholders may retain the upside of Chauvco in the Alliance Pipeline Project by the distribution to Chauvco Shareholders of rights to acquire Chauvco's 20% interest in the Alliance Pipeline Project. - Pioneer Management. Pioneer's senior management, led by Jon Brumley and Scott Sheffield, has a proven track record. - Interest in Larger Entity. Chauvco Shareholders will acquire an interest in Pioneer, which with Chauvco's Canadian and Argentine operations will be one of the largest U.S. based independent oil and gas producers. The strategic and operational fit between the two companies is exceptional. - Retain Two Chauvco Directors. Chauvco Shareholders will retain the benefit of two of Chauvco's directors by the addition of Messrs. Baroffio and Turcotte to the Pioneer Board. OPINIONS OF FINANCIAL ADVISORS Opinion of Goldman Sachs On September 3, 1997, Goldman Sachs delivered its written opinion to the Board of Directors of Pioneer to the effect that, as of the date of such opinion, and based upon and subject to the factors and assumptions set forth therein, the consideration to be paid by Pioneer pursuant to the Combination Agreement was fair to Pioneer. THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED SEPTEMBER 3, 1997, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE 48 58 OPINION, IS ATTACHED HERETO AS ANNEX J TO THIS JOINT PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. PIONEER STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. In connection with its opinion, Goldman Sachs reviewed, among other things, the Combination Agreement; the Joint Proxy Statement/Prospectus dated June 27, 1997 of Pioneer, Parker & Parsley and Mesa; Annual Reports to Stockholders and Annual Reports on Form 10-K of Parker & Parsley and Mesa for the five years ended December 31, 1996; Annual Reports to Shareholders and Annual Information Forms of Chauvco for the five years ended December 31, 1996; certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Pioneer, Parker & Parsley and Mesa; certain unaudited interim reports of Chauvco; certain other communications from Pioneer and Chauvco to their respective stockholders; certain internal financial analyses and forecasts for Pioneer and Chauvco prepared by their respective managements; and certain internal financial forecasts for Pioneer and Chauvco on a combined basis, after giving effect to the Transaction, prepared by the management of Pioneer. Goldman Sachs also held discussions with members of the senior management of Pioneer and Chauvco regarding the strategic rationale for, and potential benefits of, the Transaction and the past and current business operations, financial condition and future prospects of their respective companies. Goldman Sachs reviewed certain information provided by Chauvco relating to its oil and gas reserves and by Pioneer relating to the oil and gas reserves of Pioneer and Chauvco (the "Reserve Information"), including, but not limited to, (i) year-end reserve reports for Parker & Parsley prepared by its management and audited by independent petroleum engineers, (ii) year-end reserve reports for Mesa prepared by independent petroleum engineers, (iii) year-end reserve reports for the North American properties of Chauvco prepared by its management and audited by independent petroleum engineers, (iv) year-end reserve reports for the Argentine properties of Chauvco prepared by independent petroleum engineers, and (v) reserve estimates for Chauvco prepared by the management of Pioneer. In addition, Goldman Sachs discussed the Reserve Information with the respective managements of Pioneer and Chauvco and held discussions with members of senior management of Pioneer regarding its due diligence examination of such Reserve Information for Chauvco. In addition, Goldman Sachs reviewed the reported price and trading activity for the Pioneer Common Stock and Chauvco Common Shares, compared certain financial and stock market information for Pioneer and Chauvco with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the oil and gas industry specifically and in other industries generally and performed such other studies and analyses as it considered appropriate. Goldman Sachs relied upon the accuracy and completeness of all of the financial and other information reviewed by it and assumed such accuracy and completeness for purposes of rendering its opinion. In addition, Goldman Sachs has not made an independent evaluation or appraisal of the assets and liabilities of Pioneer and Chauvco or any of their subsidiaries and, except for the Reserve Information, Goldman Sachs has not been furnished with any such evaluation or appraisal. With respect to such Reserve Information, Goldman Sachs is not an expert in the evaluation of oil and gas properties, and it assumed with Pioneer's consent that the reserve estimates for Chauvco prepared by the management of Pioneer have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Pioneer and that such estimates approximate the actual reserves of Chauvco. Goldman Sachs also assumed with Pioneer's consent that such information and the financial forecasts, including estimates of liabilities of Chauvco after giving effect to the transactions contemplated by the Plan of Arrangement, provided to it and discussed with it with respect to Pioneer and Chauvco after giving effect to the transactions contemplated by the Plan of Arrangement have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Pioneer and that such forecasts will be realized in the amounts and at the times contemplated thereby. Goldman Sachs' advisory services and its opinion was provided for the information and assistance of the Pioneer Board in connection with its consideration of the Transaction and such opinion did not constitute a recommendation as to how any holder of Pioneer's securities should vote with respect to the Transaction. 49 59 The following is a summary of certain of the financial analyses used by Goldman Sachs in connection with providing its written opinion to the Pioneer Board on September 3, 1997: (i) Historical Stock Trading Analysis. Goldman Sachs reviewed the historical trading prices and volumes for the Chauvco Common Shares and the Pioneer Common Stock. In addition, Goldman Sachs analyzed the consideration to be paid by Pioneer pursuant to the Combination Agreement in relation to the historical average exchange ratios between shares of Pioneer Common Stock and Chauvco Common Shares. Goldman Sachs reviewed the weighted average stock prices for the prior 10, 20, 30, 60, 90, 180 and 360 day periods ending August 29, 1997. The weighted average stock prices indicated implied exchange ratios that ranged from 0.3557x to 0.4147x. Such implied exchange ratios for periods involving data prior to August 7, 1997 were based on weighted average stock prices of Parker & Parsley and Mesa in lieu of Pioneer. Based on a per share price of Pioneer Common Stock of $39.94 (the per share closing price of Pioneer Common Stock on the NYSE on August 29, 1997), the Transaction represents an exchange ratio of 0.4515x. (ii) Selected Companies Analysis. Goldman Sachs reviewed and compared certain financial information relating to Chauvco to corresponding financial information, ratios and public market multiples for ten publicly traded Canadian corporations: Anderson Exploration Ltd.; Canadian Natural Resources Ltd.; Canadian Occidental Petroleum Ltd.; Gulf Canada Resources Ltd.; Norcen Energy Resources Corp.; Northstar Energy Corp.; PanCanadian Petroleum Ltd.; Ranger Oil Ltd.; Renaissance Energy Ltd.; and Talisman Energy Inc. (the "Chauvco Selected Companies"). The Chauvco Selected Companies were chosen because they are publicly-traded companies with operations that for purposes of analysis may be considered similar to Chauvco. Goldman Sachs calculated and compared various financial multiples and ratios. The multiples of Chauvco were calculated using a price of (i) C$19.40 per Chauvco Common Share (the closing price of the Chauvco Common Shares on the TSE on May 2, 1997 (the last trading day prior to Chauvco's public announcement that it was studying strategic alternatives)) and (ii) C$21.00 per Chauvco Common Share (the closing price of the Chauvco Common Shares on the TSE on August 29, 1997). The multiples and ratios for Chauvco and each of the Chauvco Selected Companies were based on Institutional Brokers Estimate Services ("IBES") median estimates and publicly available information from respective year-end and interim reports. With respect to the Chauvco Selected Companies, Goldman Sachs considered estimated calendar year 1997 and 1998 earnings per share ("EPS") multiples that ranged from 17.4x to 189.2x for calendar year 1997 and 15.4x to 216.7x for calendar year 1998, compared to 18.7x and 13.4x, respectively, for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997; estimated calendar year 1997 and 1998 discretionary cash flow ("DCF") multiples that ranged from 5.0x to 8.3x for calendar year 1997 and 4.0x to 6.7x for calendar year 1998, compared to 7.3x and 5.3x, respectively, for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997; estimated calendar year 1997 and 1998 unlevered DCF multiples that ranged from 5.4x to 9.9x for calendar year 1997 and 4.6x to 8.5x for calendar year 1998, compared to 8.8x and 6.5x, respectively, for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997; enterprise value as a percentage of SEC PV 10 that ranged from 74% to 183%, compared to 177% for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997; enterprise value per year-end 1996 proved reserve BOE (10:1) that ranged from C$9.09 to C$13.65, compared to C$12.32 for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997; and enterprise value per year-end 1996 proved plus one-half probable BOE (10:1)that ranged from C$6.35 to C$13.27, compared to C$10.32 for Chauvco based on the closing price of Chauvco Common Shares on May 2, 1997. Goldman Sachs also reviewed and compared certain financial information relating to Pioneer to corresponding financial information, ratios and public market multiples for seven publicly traded corporations: Anadarko Petroleum Corp.; Apache Corp.; Burlington Resources, Inc./Louisiana Land and Exploration Company (pro forma for announced merger); Enron Oil & Gas Company; Oryx Energy Co.; Union Pacific Resources; and Vastar Resources, Inc. (the "Pioneer Selected Companies"). The Pioneer Selected Companies were chosen because they are publicly-traded companies with operations that for purposes of analysis may be considered similar to Pioneer. Goldman Sachs calculated and compared various financial multiples and ratios. The multiples of Pioneer were calculated using a price of $39.94 per 50 60 share of Pioneer Common Stock (the per share price of the Pioneer Common Stock on the NYSE on August 29, 1997). The multiples and ratios for Pioneer and each of the Pioneer Selected Companies were based on IBES median estimates and publicly available information from respective annual and quarterly reports. With respect to the Pioneer Selected Companies, Goldman Sachs considered estimated calendar year 1997 and 1998 EPS multiples that ranged from 17.6x to 48.9x for calendar year 1997 and 15.3x to 37.1x for calendar year 1998, compared to 54.3x and 36.9x, respectively, for Pioneer; estimated calendar year 1997 and 1998 DCF multiples that ranged from 4.9x to 14.1x for calendar year 1997 and 4.5x to 11.4x for calendar year 1998, compared to 6.7x and 6.2x, respectively, for Pioneer; and estimated calendar year 1997 and 1998 unlevered DCF multiples that ranged from 4.9x to 14.7x for calendar year 1997 and 4.6x to 12.2x for calendar year 1998, compared to 8.1x and 8.2x, respectively, for Pioneer; enterprise value as a percentage of SEC PV 10 that ranged from 75% to 114%, compared to 100% for Pioneer; and enterprise value per year-end 1996 proved reserve BOE that ranged from $6.60 to $11.91, compared to $7.39 for Pioneer. (iii) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted cash flow analysis using Pioneer's management projections for Chauvco. Goldman Sachs calculated a net present value of Chauvco's free cash flows for the years 1997 through 2001. Goldman Sachs calculated Chauvco's terminal values in the year 2001 based on multiples ranging from 4.0x DCF to 7.0x DCF. These terminal values were then discounted to present value using discount rates. Based on this analysis the implied values per Chauvco Common Share ranged from C$19.66 to C$43.01. (iv) Selected Transactions Analysis. Goldman Sachs analyzed certain information relating to 39 selected transactions in the Canadian oil and gas industry since 1995 (the "Canadian Selected Transactions"). Such analysis indicated that for the Canadian Selected Transactions transaction value per BOE (10:1) proved plus one-half probable reserves ranged from C$2.48 to C$13.31, compared to C$8.03 for the Transaction. For purposes of such analysis, reserves are reported on a gross basis (before royalty interests). Goldman Sachs also analyzed certain information relating to ten selected transactions in the Argentine oil and gas industry since 1994 (the "Argentine Selected Transactions"). Such analysis indicated that for the Argentine Selected Transactions transaction value per BOE proved reserves ranged from $2.26 to $5.95, compared to $8.59 for the Transaction. (v) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of the financial impact of the Transaction. Using earnings and DCF estimates for Pioneer and Chauvco for 1997 and 1998 prepared by Pioneer management, Goldman Sachs compared the EPS of the Pioneer Common Stock, on a standalone basis, to the EPS of the common stock of the combined companies on a pro forma basis. Goldman Sachs performed this analysis based on the following two scenarios: (i) an exchange ratio of 0.4938 (the "Maximum Case") and (ii) an exchange ratio 0.4515 (the "Minimum Case"). Based on such analyses, the Transaction would be dilutive to the Pioneer Stockholders on an EPS basis in 1997 and 1998 in each of the Maximum Case and Minimum Case. Goldman Sachs also compared the DCF per share of Pioneer Common Stock, on a standalone basis, to the DCF per share of the combined companies on a pro forma basis. Based on such analyses, the Transaction would be dilutive to the Pioneer Stockholders on a DCF basis in 1997 and accretive to the Pioneer Stockholders on a DCF basis in 1998 in each of the Maximum Case and Minimum Case. (vi) Contribution Analysis. Goldman Sachs reviewed certain historical and estimated future operating and financial information (including, among other things, earnings before interest, taxes, depreciation and amortization ("EBITDA"), net income to common, DCF, unlevered DCF, SEC PV 10, SEC PV 10 less debt, reserves and production for Pioneer, Chauvco and the pro forma combined entity resulting from the Transaction based on Pioneer's management financial forecasts for Pioneer and Chauvco. The analysis indicated that (i) Pioneer would contribute 89.8% of combined SEC PV 10, 91.0% of combined SEC PV 10 less debt, 82.5% of combined proved reserves, 78.1% of combined proved plus one-half probable reserves, 75.4% of combined proved plus probable reserves, 79.8% of combined market capitalization as of August 29, 1997, and 82.4% of enterprise value as of August 29, 1997; (ii) in 51 61 estimated calendar 1997 Pioneer would contribute 80.5% of combined EBITDA, 103.5% of combined net income to common, 81.2% of combined DCF, 83.3% of combined unlevered DCF, and 77.9% of combined production; and (iii) in estimated calendar 1998, Pioneer would contribute 73.9% of combined EBITDA, 85.5% of combined net income to common, 70.2% of combined DCF, 73.9% of combined unlevered DCF, and 70.9% of combined production. Goldman Sachs' analysis indicated that Pioneer Stockholders would own 75.2% of the combined company based on an exchange ratio 0.493827x and 76.9% of the combined company based on an exchange ratio of 0.451467x. In addition, Goldman Sachs analyzed the amount of accretion (dilution) on a per share basis from Pioneer's perspective of EBITDA, net income to common, DCF, unlevered DCF, SEC PV 10, SEC PV 10 less debt, reserves, production, market capitalization and enterprise value. This analysis was based on an exchange ratio of 0.451467x. Goldman Sachs' analysis indicated that Pioneer Stockholders would experience, for estimated 1997 and estimated 1998, respectively, a 4.6% dilution and 4.1% accretion in EBITDA, a 25.8% and 10.1% dilution in net income to common, a 5.4% dilution and 9.5% accretion in DCF, a 7.8% dilution and 4.0% accretion in unlevered DCF, and a 1.3% dilution and 8.5% accretion in production. This analysis also indicated that Pioneer Stockholders would experience a 14.4% dilution in SEC PV 10, a 15.5% dilution in SEC PV 10 less debt, a 6.9% dilution in proved reserves, a 1.6% dilution in proved plus one-half probable reserves, a 2.0% accretion in proved plus probable reserves, a 3.7% dilution in market capitalization, and a 6.7% dilution in enterprise value. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering Goldman Sachs' analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs' opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all such analyses and did not assign relative weights to any of the analyses. No company or transaction used in the above analyses as a comparison is identical to Pioneer or Chauvco or the contemplated transaction. The analyses were prepared solely for purposes of Goldman Sachs providing its opinion to the Pioneer Board as to the fairness of the consideration to be paid by Pioneer and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Pioneer, Chauvco, Goldman Sachs or any other person assumes responsibility if future results are different from those forecast. Goldman Sachs' opinion to the Pioneer Board necessarily was based on the economic, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion. As described above, Goldman Sachs' opinion to the Pioneer Board was one of many factors taken into consideration by the Pioneer Board in making its determination to approve the Combination Agreement and the Transaction. The foregoing summary does not purport to be a complete description of the analysis performed by Goldman Sachs and is qualified by reference to the written opinion of Goldman Sachs set forth in Annex J hereto. Goldman Sachs, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Goldman Sachs is familiar with Pioneer having provided certain investment banking services to predecessors of Pioneer from time to time, including having acted as financial advisor to Parker & Parsley in its August 1997 merger with Mesa; having acted as underwriters of public offerings of $150,000,000 of 8 7/8% Senior Notes due 2005 of Parker & Parsley in 1995 and common stock of Parker & Parsley in 1994; and having acted as managing underwriters of a private offering of 3,776,400 Parker & Parsley Capital LLC 6 1/4% Convertible Monthly Income Preferred Shares, guaranteed by, and convertible into, common stock of Parker & Parsley in 1994. Goldman Sachs also provided certain investment banking services to Mesa from time to time. Pioneer selected Goldman Sachs to render its opinion because it is a nationally recognized investment banking firm that has substantial experience in transactions similar to the Transaction. 52 62 Goldman Sachs provides a full range of financial, advisory and brokerage services and in the course of its normal trading activities may from time to time effect transactions and hold positions in the securities or options on securities of Pioneer and Chauvco for its own account and for the account of customers. Pursuant to a letter agreement dated August 28, 1997 (the "Engagement Letter"), Pioneer exclusively authorized Goldman Sachs to undertake a study to enable it to render its opinion with respect to the consideration to be paid in the Transaction. Pursuant to the terms of the Engagement Letter, Pioneer agreed to pay Goldman Sachs upon delivery of its opinion a fee of $1,000,000. Pioneer has also agreed to reimburse Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's fees and disbursements plus any sales, use and similar taxes, and to indemnify Goldman Sachs against certain liabilities, including certain liabilities under the federal securities laws. Opinion of Salomon Brothers Chauvco retained Salomon Brothers to act as its financial advisor in connection with the Transaction. On September 3, 1997, Salomon Brothers rendered its opinion to the Chauvco Board to the effect that, based upon and subject to certain assumptions, factors and limitations set forth in such written opinion as described below, as of such date, the Pioneer Common Stock, Exchangeable Shares or combination thereof to be received by the Chauvco Shareholders (the "Pioneer Stock Consideration") was fair, from a financial point of view, to the holders of Chauvco Common Shares as consideration for the Chauvco Common Shares after giving effect to the distribution of the CRI Shares and the Chauvco Rights. THE FULL TEXT OF SALOMON BROTHERS' OPINION DATED SEPTEMBER 3, 1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS CONSIDERED BY SALOMON BROTHERS, IS ATTACHED AS ANNEX K TO THIS JOINT PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. SALOMON BROTHERS' OPINION DELIVERED TO THE CHAUVCO BOARD WAS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE PIONEER STOCK CONSIDERATION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY CHAUVCO SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE CHAUVCO MEETING. THE SUMMARY OF THE SALOMON BROTHERS OPINION SET FORTH IN THIS JOINT PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. CHAUVCO SHAREHOLDERS ARE URGED TO READ THE ENTIRE OPINION CAREFULLY. In connection with rendering its opinion, Salomon Brothers reviewed and analyzed, among other things: (i) the Combination Agreement; (ii) certain publicly available information concerning Chauvco; (iii) certain other internal information, primarily financial in nature, including projections and estimates of reserves, concerning the business and operations of Chauvco; (iv) certain publicly available information concerning the trading of, and the trading market for, the Chauvco Common Shares; (v) certain publicly available information concerning Pioneer and its predecessor companies; (vi) certain other internal information, primarily financial in nature, including projections and estimates of reserves, concerning the business and operations of Pioneer; (vii) certain publicly available information concerning the trading of, and the trading market for, the Pioneer Common Stock and the common stocks of its predecessor companies; (viii) certain publicly available information with respect to certain other companies that Salomon Brothers believed to be comparable to Pioneer or Chauvco and the trading markets for certain of such other companies' securities; and (ix) certain publicly available information concerning the nature and terms of certain other transactions that Salomon Brothers considered relevant to its inquiry. Salomon Brothers also conducted discussions with certain officers and employees of Pioneer and Chauvco to discuss the foregoing as well as other matters that Salomon Brothers believed relevant to its inquiry. In its review and analysis and in arriving at its opinion, Salomon Brothers assumed and relied upon the accuracy and completeness of all of the financial and other information provided to it by Pioneer and Chauvco or publicly available and has neither attempted independently to verify nor assumed responsibility for verifying any of such information. Salomon Brothers did not conduct any physical inspection of any of the properties or facilities of Pioneer or Chauvco, nor did it make or obtain or assume any responsibility for making or obtaining any independent evaluations or appraisals of any of such properties or facilities. With respect to the projections of Pioneer and Chauvco, Salomon Brothers assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of Pioneer and Chauvco as to the 53 63 respective future financial performance of Pioneer and Chauvco, respectively, and Salomon Brothers expressed no view with respect to such projections. In conducting its analysis and in arriving at its opinion, Salomon Brothers considered such financial and other factors as it deemed appropriate under the circumstances including, among others, the following: (i) the historical and current financial position and results of operations of Pioneer (and its predecessor companies) and Chauvco; (ii) the business prospects of Pioneer and Chauvco; (iii) the historical and current market for the Pioneer Common Stock (and the common stocks of the predecessor companies of Pioneer), for the Chauvco Common Shares and for the equity securities of certain other companies that Salomon Brothers believed to be comparable to Pioneer or Chauvco; and (iv) the nature and terms of certain other transactions that Salomon Brothers believed to be relevant. Salomon Brothers also took into account its assessment of general economic, market and financial conditions and its knowledge of the oil and gas industry as well as its experience in connection with similar transactions and securities valuation generally. Salomon Brothers' opinion was necessarily based upon conditions as they existed and could be evaluated on the date of its opinion and Salomon Brothers assumed no responsibility to update or revise its opinion based upon circumstances or events occurring after the date of its opinion. Salomon Brothers' opinion was limited to the fairness, from a financial point of view, of the Pioneer Stock Consideration as consideration for the Chauvco Common Shares after giving effect to the distribution of the CRI Shares and the issuance of the Chauvco Rights, did not address the fairness of any other aspect of the Transaction, including the fairness of the distribution of the CRI Shares, the fairness of the issuance of the Chauvco Rights or the financial viability of CRI or the Partnership, did not address Chauvco's underlying business decision to effect the Transaction, and did not constitute a recommendation to any holder of Chauvco Common Shares as to how such holder should vote with respect to the Transaction. In addition, Salomon Brothers' opinion did not constitute an opinion or imply any conclusions as to the likely trading range for the Pioneer Common Stock or the Exchangeable Shares following consummation of the Transaction. Set forth below is a brief summary of the material financial analyses which Salomon Brothers provided to the Chauvco Board at its September 3, 1997 meeting in connection with its opinion and does not purport to be a complete description of analyses performed by Salomon Brothers. As described above, Salomon Brothers' opinion and presentation to the Chauvco Board were one of many factors taken into consideration by the Chauvco Board in making its decision to approve the Combination Agreement. The following quantitative information, to the extent it is based on market data, is based on such data as it existed at August 29, 1997, and is not necessarily indicative of current market conditions. Summary of Analysis General Valuation Approach. Salomon Brothers performed analyses intended to (i) establish ranges of reference values for the Canadian and Argentine operations of Chauvco (the "Operations"), (ii) establish ranges of reference values for the Pioneer Stock Consideration to be issued in the Transaction and (iii) compare the pro forma relative ownership by holders of Chauvco Common Shares and holders of Pioneer Common Stock in the company resulting from the Transaction to the relative contributions by the Operations and Pioneer to certain attributes of the combined company. Valuation of the Operations. Salomon Brothers determined ranges of reference values for the Operations on the basis of three valuation approaches: (i) a net asset value ("NAV") analysis based on the discounted cash flow value of the projected oil and gas reserves of the Operations; (ii) a public market analysis, which examines the market value of publicly traded common stocks of exploration and producing ("E&P") companies as a multiple of certain financial parameters; and (iii) a private market analysis, which examines the purchase price of E&P companies in recent sale transactions as a multiple of certain financial parameters. In the NAV analysis, Salomon Brothers determined the present value of projected cash flows estimated by Chauvco's management for the Operations (based on assumed prices for oil on the New York Mercantile Exchange ("NYMEX") ranging from $19.60 to $19.73 during the period from 1997 to 2001, and assumed NYMEX gas prices ranging from $2.22 to $2.40 during the same period) at discount rates of 10% and 11% to 54 64 arrive at a firm value, from which debt and other liabilities were deducted and the value of non-oil and gas assets was added. Based on this analysis, Salomon Brothers obtained a range of reference values for the Operations of C$17.48 to C$25.25 per Chauvco Common Share. In its public market analysis, Salomon Brothers obtained ranges of multiples of market value of certain Canadian and international publicly traded E&P companies to their reserves, production, estimated 1997 and 1998 earnings before interest, taxes, depreciation and amortization ("EBITDA") and estimated 1997 and 1998 cash flow. Applying these multiples to such parameters with respect to the Operations, Salomon Brothers obtained a range of reference values for the Operations of C$19.00 to C$26.00 per Chauvco Common Share. In its private market analysis, Salomon Brothers examined six merger and acquisition transactions involving Canadian E&P companies and seven transactions involving international E&P companies, and obtained ranges of multiples of the purchase price in such transactions to the reserves, estimated EBITDA and estimated cash flow of the acquired companies. Salomon Brothers then applied these multiples to the corresponding parameters with respect to the Operations, thereby arriving at a range of reference values for the Operations of C$19.86 to C$25.40 per Chauvco Common Share. Salomon Brothers noted that the implied value of the Pioneer Stock Consideration of C$24.11 based upon the market value for Pioneer Common Stock at August 29, 1997 compared favorably to the reference value ranges resulting from its analyses. Valuation of Pioneer Common Stock. Salomon Brothers performed the same analyses with respect to Pioneer as it had with respect to Chauvco to obtain ranges of reference values for the Pioneer Common Stock. Salomon Brothers then compared those ranges with recent trading prices for the Pioneer Common Stock, including the trading prices on which the terms of the Pioneer Stock Consideration were determined. In its NAV analysis, Salomon Brothers discounted to present value projected cash flows estimated by Pioneer's management (based on assumptions similar to those used for the Chauvco NAV analysis) at discount rates of 10.5% and 11.5% and terminal value multiples of 6.5x and 7.5x to arrive at a firm value, from which debt and other liabilities were deducted. Based on this analysis, Salomon Brothers obtained a range of reference values for the Pioneer Common Stock of $37.25 to $47.72 per share. In its public market analysis, Salomon Brothers obtained ranges of multiples of market value of eight U.S. publicly traded E&P companies to their proven reserves, estimated 1997 and 1998 EBITDA and estimated 1997 and 1998 cash flow. Applying these multiples to such parameters with respect to Pioneer, Salomon Brothers obtained a range of reference values for the Pioneer Common Stock of $37.00 to $45.00 per share. In its private market analysis, Salomon Brothers examined six purchase and sale transactions involving U.S. E&P companies, and obtained ranges of multiples of the purchase price in such transactions to the proven reserves, estimated 1998 EBITDA and estimated 1998 cash flow of the acquired companies. Salomon Brothers then applied these multiples to the corresponding parameters with respect to Pioneer, thereby arriving at a range of reference values for the Pioneer Common Stock of $39.00 to $46.00 per share. Salomon Brothers noted that the trading price of the Pioneer Common Stock at August 29, 1997 was $39.94 per share, the 10-day average of such trading price for the period ended August 29, 1997 was $37.58 per share and the 52-week high and low values of such trading price for the period ended August 29, 1997 (reflecting the trading price of Parker & Parsley for periods prior to the Parker/Mesa Merger on August 7, 1997) were $24.63 and $39.94, respectively, and that such historical trading prices generally were below or at the lower end of the ranges of reference values obtained by Salomon Brothers in its analyses. Contribution Analysis. Salomon Brothers calculated the relative contribution by the Operations to the pro forma combined company resulting from the Transaction with respect to various financial statistics, including latest 12 months, 1997 estimated and 1998 estimated EBITDA, 1997 and 1998 estimated cash flow, reserves, 1997 and 1998 estimated production, equity value and firm value. This analysis showed that, not taking into account synergies and efficiencies potentially realizable from the transaction, Chauvco would contribute between 17% and 19% of EBITDA, between 19% and 20% of cash flow, 18% of reserves, 24% of 55 65 production, 23% of equity value and 20% of firm value of the combined company. By comparison, based on the trading price of the Pioneer Common Stock at August 29, 1997, the Pioneer Stock Consideration issuable to Chauvco Shareholders would represent 22.5% of the pro forma equity of the combined company. Engagement of Salomon Brothers. Salomon Brothers was retained by Chauvco based on its experience and expertise as a financial advisor in connection with mergers and acquisitions and with companies engaged in the oil and gas industry. Salomon Brothers is an internationally recognized investment banking firm that provides financial services in connection with a wide range of business transactions. As part of its business, Salomon Brothers regularly engages in the valuation of companies and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and for other purposes. Chauvco has agreed to pay Salomon Brothers the following cash fees in connection with its engagement: (i) a retainer fee of C$200,000, which has been paid, (ii) a fee of C$500,000 upon the execution of the Combination Agreement, which has been paid, and (iii) a fee payable upon consummation of the Transaction in an amount equal to the greater of (A) 75% of the aggregate market value of the Pioneer Common Stock, Exchangeable Shares, CRI Shares and Chauvco Rights at the Effective Time multiplied by the Fee Multiple (as defined below) or (B) C$2,500,000, in each case less the fees described in the foregoing clauses (i) and (ii). The "Fee Multiple" is defined to mean (i) the product of 0.0005 and the aggregate consideration, divided by the fully diluted number of Chauvco Common Shares, less (ii) 0.005. Chauvco has also agreed to reimburse Salomon Brothers for its reasonable out-of-pocket expenses and to indemnify Salomon Brothers and certain related persons against certain liabilities, including liabilities under the U.S. federal securities laws. Opinion of RBC DS The following is a summary of the RBC DS fairness opinion. RBC DS believes that its analyses must be considered as a whole and that selecting portions of the analyses or the factors considered by it, without considering all factors and analyses together, could create a misleading view of the process underlying the RBC DS fairness opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Any attempt to do so could lead to undue emphasis on any particular factor or analysis. The RBC DS fairness opinion is not to be construed as a recommendation to any holder of Chauvco Common Shares as to whether to vote in favor of the Arrangement. This summary is qualified in its entirety by the RBC DS fairness opinion, a copy of which is attached as Annex L. CHAUVCO SHAREHOLDERS ARE URGED TO READ THE RBC DS FAIRNESS OPINION IN ITS ENTIRETY. RBC DS was formally engaged by the Chauvco Board through an agreement between Chauvco and RBC DS dated February 28, 1997 which provides that RBC DS is to be paid a fee for its services, the vast majority of which is contingent upon the consummation of the Arrangement. The fee is variable based on the consideration received by Chauvco Shareholders. Based on RBC DS's estimate of the value of the consideration on the date of the RBC DS fairness opinion, the fee payable would be approximately C$5.2 million. In addition, RBC DS is to be reimbursed for its reasonable out-of-pocket expenses and to be indemnified by Chauvco in certain circumstances. In preparing the RBC DS fairness opinion, RBC DS reviewed and relied upon certain financial information and operational information regarding Chauvco and Pioneer and the Arrangement. RBC DS also conducted interviews and discussions with Chauvco's and Pioneer's management and with Chauvco's independent oil and gas reservoir engineering consultants. RBC DS relied upon and assumed the completeness, accuracy and fair presentation of the information and representations it received. RBC DS did not review any drafts of the Joint Proxy Statement. RBC DS was not, to the best of its knowledge, denied access by Chauvco to any information requested by RBC DS. RBC DS made a number of assumptions, one of which was that all of the conditions required to implement the Arrangement will be met. The RBC DS fairness opinion was rendered on the basis of securities markets, economic, financial and general business conditions prevailing as at the date thereof and the condition and prospects, financial and otherwise, of Chauvco, Pioneer and their respective subsidiaries and affiliates, as they were reflected in the information and as they were represented to RBC DS in discussions with management of Chauvco and Pioneer, respectively. In its analyses 56 66 and in preparing the RBC DS fairness opinion, RBC DS made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of RBC DS or any party involved in the Arrangement. RBC DS assessed the fairness, from a financial point of view, of the Arrangement to the Chauvco Shareholders based upon a number of factors. These factors included (i) an analysis of multiples paid in recent comparable acquisition transactions in the Canadian oil and gas industry, (ii) a net asset value analysis which incorporates a discounted cash flow approach, (iii) a comparison of the value offered to holders of Chauvco Common Shares under the Arrangement to recent trading levels for the Chauvco Common Shares; and (iv) a review of the strategic alternatives review process, which included the solicitation of a wide range of parties concerning their potential interest in making an acquisition of the Chauvco Common Shares or the assets of Chauvco or reorganizing or recapitalizing Chauvco. RBC DS also reviewed the trading multiples of publicly traded Canadian oil and gas companies comparable to Chauvco, from the perspective of whether a public market value analysis might exceed the precedent transaction values. However, RBC DS concluded that public company multiples implied values that were below the precedent transaction values. Given the foregoing and that public company values generally reflect minority discount values rather than "en bloc" values, RBC DS did not rely on this methodology. In considering the value of the consideration being offered to holders of Chauvco Common Shares under the Arrangement, RBC DS considered the aggregate of the value derived from the Exchangeable Shares or shares of Pioneer Common Stock, determined through a review of recent trading levels for the Pioneer Common Stock and the estimated market price of the Pioneer Common Stock subsequent to the Arrangement; and the estimated value of the CRI Shares and opportunity to participate in Alliance. RBC DS did not consider the specific circumstances, particularly with respect to income tax consequences, of any particular Chauvco Shareholder. In assessing the value of the Exchangeable Shares or the Pioneer Common Stock being offered, RBC DS relied on the market trading value approach. Since each holder of Chauvco Common Shares will receive a minority interest in Pioneer and will not be able to effect a sale of 100% of Pioneer, RBC DS concluded it was not appropriate to consider methodologies that are based on the assumption of a change of control transaction. RBC DS believes that the market price of the Pioneer Common Stock is an appropriate indicator of the value of the Exchangeable Shares being offered to the Chauvco Shareholders under the Arrangement, in view of the following: (i) Pioneer is well followed by equity market analysts and trades on a comparable basis and in a manner consistent with other comparable, publicly traded oil and gas producers in the United States; (ii) based upon a composite of research analysts' forecasts of 1998 cash flow for each of Chauvco and Pioneer, the Arrangement, if completed, will be accretive to Pioneer's forecast cash flow per share; and (iii) Pioneer Common Stock has a reasonably high degree of liquidity as evidenced by the average daily volume of 733,762 shares since trading in Pioneer stock commenced on August 8, 1997. RBC DS also reviewed the trading history of other exchangeable shares traded on the TSE versus the shares of their respective U.S. parents. RBC DS concluded that such exchangeable shares generally track the underlying security on an currency exchange rate adjusted basis and, as such, did not apply a discount or premium to the Exchangeable Shares versus the underlying trading value of Pioneer Common Stock. During RBC DS' review of Pioneer, including meetings with Pioneer management, RBC DS was not made aware of any material information regarding Pioneer which had not been publicly disclosed which would reasonably be expected to materially adversely affect the market price of the Pioneer Common Stock. Based upon the closing price of Pioneer Common Stock on the NYSE on September 3, 1997, the date of the RBC DS fairness opinion, the value to be received per Chauvco Common Share under the Arrangement in the form of Exchangeable Shares would have been C$26.48. In addition to the Exchangeable Shares, Chauvco Shareholders will receive the CRI Shares on a one-for-one basis and an opportunity to participate in the Partnership. In assessing the value of CRI, RBC DS relied on the market trading value approach. Since holders of Chauvco Common Shares will receive a minority interest in CRI and will not be able to effect a sale of 100% of CRI, RBC DS concluded it was not appropriate to consider methodologies that are based on the 57 67 assumption of a change of control transaction. RBC DS considered various multiples of selected, publicly-traded companies which were deemed to be most comparable to CRI. RBC DS particularly relied upon the capitalization of discretionary cash flow approach which ascribes a common equity value based on a capitalization of estimated 1997 and forecast 1998 discretionary cash flow. In addition, RBC DS considered the capitalization of earnings before depreciation, depletion, amortization, interest and income taxes ("EBITDA") approach, which ascribes a value to total assets (the "Enterprise Value") before giving effect to the manner in which they have been financed. The Enterprise Value plus excess working capital, less actual debt and preferred shares, yields a common equity value. In considering the value of the CRI Shares, RBC DS reviewed Chauvco management's forecasts and found them to be reasonable. These forecasts for the Gabon operations for the remainder of 1997 and for 1998 were utilized in RBC DS' calculations. As a check on the reasonableness of this analysis, RBC DS considered the offers received for Chauvco's assets in Gabon and the net present value of fields in Gabon included in the independent engineering reports prepared by Gilbert Laustsen Jung Associates Ltd. In assessing the value of the opportunity to participate in the Partnership, RBC DS considered: (i) the net investment by Chauvco in the Alliance project to date; and (ii) an option value approach based on a review of the underlying business opportunity. Given the relatively early stage of development of the project, RBC DS relied primarily on the net investment to date in determining an approximate value to the Chauvco Shareholders. RBC DS concluded that these additional elements of consideration received in the form of the CRI Shares and the opportunity to participate in the Partnership, implied that the total consideration per Chauvco Common Share under the Arrangement would be in the region of C$3.00 to C$4.50 per Chauvco Common Share above the price implied by the Exchangeable Share. As part of RBC DS' review of the fairness of the Arrangement from a financial point of view to the holders of Chauvco Common Shares, RBC DS reviewed precedent transactions in the Canadian oil and gas industry in order to compare the multiples paid under such transactions to the multiples implied by the Arrangement. RBC DS concluded that the implied transaction multiples for Chauvco under the Arrangement are consistent with multiples paid in precedent transactions. RBC DS also utilized the net asset value ("NAV") approach, which ascribes a separate value for each category of asset and liability utilizing the methodology appropriate in each case; the sum of total assets less total liabilities yields the NAV. This approach ascribes value to the proved and probable reserves existing at the time of valuation on the basis of discounted future before-tax and after-tax cash flows, and does not anticipate the future addition of reserves through an ongoing exploration and development program. This approach is known as a "depletion" or "blowdown" evaluation and is a common method of evaluation of petroleum interests (reserves and related production facilities) in the oil and gas industry. Capital expenditures required to develop existing reserves are deducted from reserve values. Provision is made for costs associated with future well abandonment and reclamation of sites related to such wells and associated plant and facility equipment. In addition, a value is ascribed for other material assets, including undeveloped land, utilizing the methodology appropriate in each case. RBC DS concluded that the consideration offered by Pioneer for the Chauvco Common Shares represents a premium to the range of the RBC DS estimates of NAV. RBC DS also reviewed the recent trading levels for Chauvco Common Shares. The closing price of the Chauvco Common Shares on the TSE on September 3, 1997, the last trading day prior to the announcement of the Transaction, was C$22.00 per Chauvco Common Share. The consideration offered represents a premium of between 34.0% and 40.8%. RBC DS concluded that this range of premiums is consistent with premiums for recent takeover transactions in the oil and gas sector in Canada. At the direction of the Chauvco Board, RBC DS and Salomon Brothers undertook a broad solicitation of interest from a wide range of parties concerning their willingness to propose some form of transaction with Chauvco. In addition, RBC DS received expressions of interest from parties who had become aware of the solicitation process through the public announcement made by the Chauvco Board. Upon execution of a confidentiality agreement, interested parties were provided access to the management, technical staff and confidential information of Chauvco. RBC DS had no reason to believe that any party with an interest in acquiring Chauvco was not provided the opportunity to ascertain the value of Chauvco and to make a 58 68 proposal. RBC DS concluded that the Arrangement offers the highest consideration to holders of Chauvco Common Shares of the various proposals received during the solicitation process. Given the basis and scope of the RBC DS fairness opinion and subject to the assumptions and limitations contained therein, RBC DS concluded that, as at September 3, 1997, the Arrangement is fair from a financial point of view to the holders of Chauvco Common Shares. INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION Appointments to Pioneer Board of Directors. On the Effective Date, James R. Baroffio, currently a Chauvco director, will be appointed as a Class II Director to the Pioneer Board to serve until Pioneer's 1999 annual stockholders meeting and will be nominated for re-election at Pioneer's 1999 annual stockholders meeting. Also, Guy J. Turcotte, Chauvco's Chairman and Chief Executive Officer, will be nominated as a director of Pioneer for election at Pioneer's 1998 annual stockholders meeting. Indemnification of Chauvco Officers and Directors. The Combination Agreement provides that all rights to indemnification for Chauvco officers and directors will survive the Arrangement and remain in full force and in accordance with the ABCA and Chauvco's and each of its subsidiaries' charter documents and bylaws. Termination Fees. Chauvco has entered into executive involuntary termination and severance agreements with each of the officers of Chauvco which provide for a payment in the event that an officer's employment is terminated by Chauvco at any time other than for just cause. In such event, Chauvco is required to pay to such officer an amount equal to two times such officer's monthly salary and benefits for each year the officer has been employed by Chauvco, subject to a minimum payment equal to the officer's salary and benefits for one year. Chauvco has also created a staff severance plan which provides that an employee will receive between three and six weeks wages per year employed in the event of a change of control of Chauvco and the subsequent termination of the employee. Retention Bonuses. Chauvco has previously adopted an employee retention plan which provides that Chauvco will pay a retention bonus to each employee (including officers) of Chauvco on the date which is 180 days after there has been a change of control, provided that the employee is still employed by Chauvco on that date. The amount of the retention bonus for each employee varies between two and six months' salary and benefits based on their category of employment. If the employee's employment is terminated by Chauvco during such 180-day period, other than for just cause, the employee shall be entitled to a pro rated share of the retention bonus based on the number of days of employment following the change of control, subject to a minimum payment of one-half of the retention bonus. ACCOUNTING TREATMENT The Transaction will be accounted for as a purchase of Chauvco by Pioneer for U.S. GAAP purposes. For presentation of certain anticipated effects of the accounting treatment on the combined financial position and results of operations of Pioneer after giving effect to the purchase of Chauvco by Pioneer, see "Unaudited Pro Forma Combined Financial Statements." PROCEDURES FOR EXCHANGE BY CHAUVCO SHAREHOLDERS AND CHAUVCO OPTIONHOLDERS Chauvco Shareholders. Enclosed with copies of this Joint Proxy Statement delivered to the registered holders of Chauvco Common Shares is the Letter of Transmittal and Election Form which, when duly completed and returned together with a certificate for Chauvco Common Shares, will enable each Chauvco Shareholder to receive the number of shares of Pioneer Common Stock, Exchangeable Shares or a combination thereof (determined in accordance with the Exchange Ratio and, in the case of a Canadian resident, the election of the Chauvco Shareholder), CRI Shares and, if applicable, the Cash Payment, to which such holder is entitled pursuant to the Arrangement. See "-- Transaction Mechanics and Description of Exchangeable Shares and Other Features." 59 69 No certificates representing fractional shares of Pioneer Common Stock or Exchangeable Shares will be issued. In lieu of fractional shares of Pioneer Common Stock or Exchangeable Shares, each Chauvco Shareholder who would otherwise be entitled to receive such a fraction will be paid by Pioneer Canada an amount of cash (rounded to the nearest whole cent) equal to the Canadian dollar equivalent of the product of (i) such fraction, multiplied by (ii) the Pioneer Stock Price. Any use of the mails to transmit a certificate for Chauvco Common Shares and a related Letter of Transmittal and Election Form is at the risk of the Chauvco Shareholder. If these documents are mailed, it is recommended that registered mail, with return receipt requested, properly insured, be used. If the Arrangement proceeds and the Transaction is completed, the certificates and Cash Payment, if any, issuable to a former holder of Chauvco Common Shares who has complied with the procedures set out above, together with a check in the amount, if any, payable in lieu of fractional shares will, as soon as practicable after the later of the Effective Date and the date of receipt of a certificate for Chauvco Common Shares and a related Letter of Transmittal and Election Form, be (a) forwarded to the holder at the address specified in the Letter of Transmittal and Election Form by first class mail or (b) made available at the offices of The Montreal Trust Company of Canada for pickup by the holder, if requested by the holder in the Letter of Transmittal and Election Form. If the Arrangement does not proceed, all certificates representing Chauvco Common Shares transmitted with a related Letter of Transmittal and Election Form will be returned to Chauvco Shareholders. Where a certificate for Chauvco Common Shares has been destroyed, lost or mislaid, the registered holder of that certificate should immediately contact The Montreal Trust Company of Canada regarding the issuance of a replacement certificate upon the holder satisfying such requirements as may be imposed by Chauvco in connection with issuance of the replacement certificate. Chauvco Optionholders. Chauvco Optionholders must complete an Option Letter of Transmittal and Election Form and deposit such form with The Montreal Trust Company of Canada prior to the date that is two days before the Chauvco Meeting indicating the election of the Chauvco Optionholder to pay or not to pay the Option Payment. In the event that a Chauvco Optionholder has failed to make an election in the Option Letter of Transmittal and Election Form, such Chauvco Optionholder shall be deemed to have elected not to pay the Option Payment and will receive less Pioneer Common Stock than the Chauvco Optionholder would have received if the Chauvco Optionholder elected to pay the Option Payment. In the event that a Chauvco Optionholder has elected to make the Option Payment but fails to make the Option Payment on or before the delivery of the Securities to the Chauvco Optionholder, The Montreal Trust Company of Canada shall be entitled to sell all or any portion of the Pioneer Common Stock held on behalf of such Chauvco Optionholder to satisfy the Option Payment and remit the same to Pioneer Canada. See "-- Transaction Mechanics and Description of Exchangeable Shares and Other Features." No certificates representing fractional shares of Pioneer Common Stock will be issued. In lieu of fractional shares of Pioneer Common Stock, each Chauvco Optionholder who would otherwise be entitled to receive such a fraction will be paid by Pioneer Canada an amount of cash (rounded to the nearest whole cent) equal to the Canadian dollar equivalent of the product of (i) such fraction, multiplied by (ii) the Pioneer Stock Price. STOCK EXCHANGE LISTING The Pioneer Common Stock currently trades on the NYSE. The shares of Pioneer Common Stock to be issued in connection with the Transaction have been approved for listing on the NYSE, subject to Pioneer Stockholder approval and official notice of issuance. As a condition precedent to the Arrangement, the Exchangeable Shares and the CRI Shares shall be listed for trading on the TSE. 60 70 ELIGIBILITY FOR INVESTMENT IN CANADA Qualified Investments. Provided the CRI Shares, Exchangeable Shares and the shares of Pioneer Common Stock are listed on a prescribed stock exchange (which currently includes the TSE and the NYSE), such securities will be qualified investments under the Canadian Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans. The Voting Rights and Exchange Rights will not be qualified investments under the Canadian Tax Act. However, as indicated under "Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders -- Canadian Federal Income Tax Considerations -- Chauvco Shareholders Resident in Canada," Chauvco is of the view that the fair market value of these rights is nominal. For a description of the Voting Rights and the Exchange Rights, see "Description of Capital Stock -- Voting and Exchange Trust Agreement." Foreign Property. Provided the Exchangeable Shares are listed on a prescribed stock exchange in Canada (which currently includes the TSE) and Pioneer Canada continues to maintain a substantial presence in Canada, the Exchangeable Shares will not be foreign property under the Canadian Tax Act for trusts governed by registered pension plans, registered retirement savings plans, registered retirement income funds and deferred profit sharing plans or for certain other tax-exempt persons. Pioneer Canada will be considered to have a substantial presence in Canada if it satisfies certain asset tests or if it maintains an office in Canada and Pioneer Canada, or a corporation controlled by it, employs more than five employees in Canada full time in the active conduct of a business, other than an investment activity or a business carried on through a partnership of which the corporation is not a majority interest partner. Chauvco is of the view that following the Arrangement, Pioneer Canada will satisfy this substantial presence test and expects that Pioneer Canada will continue to satisfy the test. The CRI Shares and the shares of Pioneer Common Stock will be foreign property under the Canadian Tax Act as will the Voting Rights and Exchange Rights. REGULATORY MATTERS The Transaction is subject to the premerger filing requirements of the HSR Act, and on , 1997, Pioneer, Chauvco and Guy Turcotte made premerger filings under the HSR Act with the FTC and the Antitrust Division of the Department of Justice. On , 1997, the FTC notified Pioneer, Chauvco and Guy Turcotte that their respective requests for early termination of the waiting period under the HSR Act had been granted and that the waiting period had been terminated. The Transaction is also subject to the expiration of the applicable waiting period under the Competition Act, Canada, and the receipt of necessary approvals under the Investment Canada Act. On , 1997 Pioneer filed a short form notification filing and an application for an advance ruling certificate under the Competition Act and on , 1997 Pioneer made a review application under the Investment Canada Act. Pioneer and Chauvco have applied for and expect to receive rulings or orders of certain provincial securities regulatory authorities in Canada to permit the issuance to Chauvco Shareholders of the CRI Shares, Exchangeable Shares and Pioneer Common Stock and to permit resale of the CRI Shares, Exchangeable Shares and Pioneer Common Stock in such provinces without restriction by a shareholder other than a "control person." RESALE OF EXCHANGEABLE SHARES, PIONEER COMMON STOCK AND CRI SHARES RECEIVED IN THE TRANSACTION United States. The issuance of Exchangeable Shares, Pioneer Common Stock and CRI Shares to Chauvco Shareholders and Chauvco Optionholders will not be registered under the Securities Act. Such shares will be issued in reliance upon the exemption provided by Section 3(a)(10) of the Securities Act. Section 3(a)(10) exempts securities issued in exchange for one or more outstanding securities from the general requirement of registration where the terms and conditions of the issuance and exchange of such securities have been approved by any court of competent jurisdiction, after a hearing upon the fairness of the terms and conditions of the issuance and exchange at which all persons to whom such securities will be issued have the right to appear. The Court is authorized to conduct a hearing to determine the fairness of the terms and conditions of the Arrangement, including the proposed issuance of securities in exchange for other 61 71 outstanding securities. The Court entered the Interim Order on , 1997 and, subject to the approval of the Arrangement by the Chauvco Shareholders, a hearing on the fairness of the Arrangement will be held on , 1997 by the Court. See "-- Court Approval of the Arrangement and Completion of the Transaction." Pioneer and Chauvco believe that the issuance by Pioneer Canada of the Exchangeable Shares, the Pioneer Common Stock and the CRI Shares in exchange for the Chauvco Common Shares and Chauvco Options is exempt under Section 3(a)(10) of the Securities Act. Pioneer has received a letter from the SEC confirming that the staff of the Division of Corporation Finance of the SEC will not recommend any enforcement action to the SEC if Pioneer Canada issues the Exchangeable Shares, the Pioneer Common Stock and the CRI Shares in exchange for the Chauvco Common Shares and Chauvco Options in reliance upon such exemption. The Exchangeable Shares, Pioneer Common Stock and the CRI Shares will be freely transferable under U.S. federal securities laws, except that Exchangeable Shares, Pioneer Common Stock and the CRI Shares received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of Chauvco prior to the Transaction may be resold by them only in transactions permitted by the resale provisions of Rule 145(d)(1), (2), or (3) promulgated under the Securities Act or as otherwise permitted under the Securities Act. Rule 145(d) (1) generally provides that "affiliates" of either Chauvco or Pioneer may not sell securities received in the Arrangement unless pursuant to an effective registration statement or unless pursuant to the volume, current public information, manner of sale and timing limitations of Rule 144. These limitations generally require that any sales made by an affiliate in any three-month period not exceed the greater of 1% of the outstanding shares of Pioneer or the average weekly trading volume over the four calendar weeks preceding the placement of the sell order and that such sales be made in unsolicited, open market "brokers transactions." Rules 145(d)(2) and (3) generally provide that the foregoing limitations lapse for non-affiliates of Pioneer after a period of one or two years, respectively, depending upon whether certain currently available information continues to be available with respect to Pioneer. Persons who may be deemed to be affiliates of an issuer generally include individuals or entities that control, are controlled by, or are under common control with, such issuer and may include certain officers and directors of such issuer as well as principal shareholders of such issuer. Chauvco and Pioneer have entered into affiliates agreements with each of the Chauvco Affiliates restricting such persons in connection with the sale, pledge or other disposal of Exchangeable Shares, Pioneer Common Stock and CRI Shares. See, "-- Other Agreements -- Affiliates Agreements." Pioneer has agreed that it will file and maintain in effect a registration statement on Form S-3 covering the issuance of the Pioneer Common Stock from time to time in exchange for the Exchangeable Shares. The shares of Pioneer Common Stock issued from time to time in exchange for the Exchangeable Shares will be therefore freely transferable under U.S. federal securities laws, except that shares of Pioneer Common Stock received by persons who are deemed to be "affiliates" of Chauvco prior to the consummation of the Transaction will be subject to the same limitations described above that would apply if they continued to hold Exchangeable Shares. Canada. Pioneer and Chauvco have applied for and expect to receive rulings or orders of certain provincial securities regulatory authorities in Canada to permit the issuance to Chauvco Shareholders of the CRI Shares, Exchangeable Shares and Pioneer Common Stock and to permit resale of the CRI Shares, Exchangeable Shares and Pioneer Common Stock in such provinces without restriction by a shareholder other than a "control person," provided that no unusual effort is made to prepare the market for any such resale or to create a demand for the securities which are the subject of any such resale and no extraordinary commission or consideration is paid in respect thereof. Applicable Canadian securities legislation provides a rebuttable presumption that a person or company is a control person in relation to an issuer where the person or company alone or in combination with others holds more than 20% of the outstanding voting securities of the issuer. Upon completion of the Arrangement, Chauvco will cease to be a reporting issuer and Pioneer Canada will become a reporting issuer in certain of the provinces of Canada. Pioneer and Chauvco have also applied on behalf of Pioneer Canada to exempt Pioneer Canada from certain statutory financial, insider trading, and other reporting requirements in such provinces on the condition that Pioneer files with the securities commissions of 62 72 such provinces copies of certain of its reports filed with the SEC and that holders of Exchangeable Shares receive certain materials that are sent to holders of Pioneer Common Stock. Pioneer and Chauvco have also applied for rulings or orders of certain provincial securities regulatory authorities in Canada to permit the issuance of Pioneer Common Stock to holders of Exchangeable Shares, and to permit the resale of Pioneer Common Stock by such holders without the requirement of filing a prospectus. CONTINUANCE OF PIONEER CANADA UNDER THE ABCA Pursuant to the Plan of Arrangement, at the Effective Time, Pioneer Canada, which is currently incorporated pursuant to the BCCA, will be continued under the ABCA. Prior to the Effective Time, Pioneer will cause the sole shareholder of Pioneer Canada to pass a special resolution authorizing the continuance of Pioneer Canada under the ABCA. Overall, the rights of a shareholder of a corporation governed by the ABCA are similar to the rights of a shareholder of a company governed by the BCCA; however, there are certain instances where specific shareholder rights under the ABCA are not as broad as the rights granted by the BCCA. Under the ABCA, a fundamental change, including an amendment to the articles, amalgamation, arrangement, extraordinary sale or continuance merely requires the approval of not less than two-thirds of the votes cast by the shareholders who vote in respect of the resolution to approve such change whereas under the BCCA the approval of three-quarters of the votes cast is required. For further information regarding the differences between the ABCA and BCCA, Pioneer Stockholders and Chauvco Shareholders should consult their legal advisors and refer to the Acts. BUSINESS COMBINATION COSTS Pioneer and Chauvco expect to incur nonrecurring business combination costs in connection with the Transaction estimated to be between $20 million and $30 million. DISSENTERS' RIGHTS See "Dissenting Shareholders' Rights." INCOME TAX CONSIDERATIONS TO CHAUVCO SHAREHOLDERS AND CHAUVCO OPTIONHOLDERS CANADIAN FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Bennett Jones Verchere and Felesky Flynn, joint Canadian tax counsel for Chauvco, the following is a summary of the principal Canadian federal income tax considerations generally applicable to Chauvco Shareholders who, for purposes of the Canadian Tax Act, hold their Chauvco Common Shares and will hold their Exchangeable Shares, CRI Shares and shares of Pioneer Common Stock as capital property and deal at arm's length with Chauvco and Pioneer. All Chauvco Shareholders should consult their own tax advisors as to whether, as a matter of fact, they hold their Chauvco Common Shares and will hold their Exchangeable Shares, CRI Shares and shares of Pioneer Common Stock as capital property for the purposes of the Canadian Tax Act. In addition, the mark-to-market rules contained in the Canadian Tax Act relating to financial institutions (including certain financial institutions, registered securities dealers and corporations controlled by one or more of the foregoing) will deem such financial institutions not to hold their Chauvco Common Shares, Exchangeable Shares, CRI Shares and shares of Pioneer Common Stock as capital property for purposes of the Canadian Tax Act. Chauvco Shareholders that are financial institutions should consult their own tax advisors to determine the tax consequences to them of the application of the mark-to-market rules. This summary is based on the current provisions of the Canadian Tax Act, the regulations thereunder, and joint Canadian tax counsels' understanding of the current administrative practices of Revenue Canada, Customs, Excise and Taxation ("Revenue Canada"). This summary takes into account the amendments to 63 73 the Canadian Tax Act and regulations publicly announced by the Minister of Finance prior to the date hereof (the "Proposed Amendments") and assumes that all Proposed Amendments will be enacted in their present form. However, no assurances can be given that the Proposed Amendments will be enacted in the form proposed, or at all. Except for the foregoing, this summary does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax considerations described herein. WHILE THIS SUMMARY IS INTENDED TO ADDRESS ALL PRINCIPAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS, IT IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF CHAUVCO COMMON SHARES OR CHAUVCO OPTIONS. THEREFORE, SUCH HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES. NO ADVANCE INCOME TAX RULING HAS BEEN OBTAINED FROM REVENUE CANADA TO CONFIRM THE TAX CONSEQUENCES OF ANY OF THE TRANSACTIONS DESCRIBED HEREIN. For purposes of the Canadian Tax Act, all amounts relating to the acquisition, holding or disposition of shares of Pioneer Common Stock, including dividends, adjusted cost base and proceeds of disposition must be converted into Canadian dollars based on the prevailing United States dollar exchange rate at the time such amounts arise. Chauvco Shareholders Resident in Canada The following portion of the summary is applicable to Chauvco Shareholders who, for purposes of the Canadian Tax Act, are resident in Canada. Transfer of Chauvco Common Shares to Pioneer Canada for CRI Shares, the Cash Payment, and either, Exchangeable Shares, shares of Pioneer Common Stock or a combination of both. Under the Arrangement, Chauvco Shareholders will transfer their Chauvco Common Shares to Pioneer Canada in consideration for CRI Shares on a one-for-one basis and, at their election, either Exchangeable Shares, shares of Pioneer Common Stock or a combination of both. In certain circumstances, they may also receive a Cash Payment from Pioneer Canada in lieu of a number of Exchangeable Shares and shares of Pioneer Common Stock. Chauvco Shareholders who elect (or, because of a failure to make an election, are deemed to have elected) to only receive shares of Pioneer Common Stock in consideration for their Chauvco Common Shares will recognize a capital gain (or a capital loss) in an amount equal to the difference between (i) the aggregate fair market value of the CRI Shares and shares of Pioneer Common Stock and the amount of any Cash Payment so received, and (ii) the aggregate adjusted cost base of their Chauvco Common Shares so transferred and reasonable costs of disposition, and such Chauvco Shareholders will be deemed to have acquired their CRI Shares and shares of Pioneer Common Stock at a cost equal to the respective fair market value of such securities. Three-quarters of any capital gain (referred to in the Canadian Tax Act as a "taxable capital gain") must be included in income and three-quarters of any capital loss (referred to in the Canadian Tax Act as an "allowable capital loss") may generally be used to offset taxable capital gains in the year the loss arises, in any of the three prior years or in any subsequent year. A Chauvco Shareholder that is throughout the relevant taxation year a "Canadian-controlled private corporation" (as defined in the Canadian Tax Act) may be liable to pay an additional refundable tax of 6 2/3% on its "aggregate investment income" for the year, which is defined to include taxable capital gains (but not dividends or deemed dividends deductible in computing taxable income). If a Chauvco Shareholder is a corporation, the amount of any capital loss arising from a disposition or deemed disposition of Chauvco Common Shares may be reduced by the amount of dividends received or deemed to have been received by it on the Chauvco Common Shares previously owned by such holder, to the extent and under circumstances prescribed by the Canadian Tax Act. Similar rules may apply where a 64 74 corporation is a member of a partnership or a beneficiary of a trust that owns Chauvco Common Shares or where a trust or partnership of which a corporation is a beneficiary or a member is a member of a partnership or a beneficiary of a trust that owns Chauvco Common Shares. Capital gains realized by a Chauvco Shareholder who is an individual may be subject to an alternative minimum tax. The Canadian Tax Act provides that the tax payable by individuals (other than certain trusts) is the greater of the tax otherwise determined and an alternative minimum tax. For purposes of computing the alternative minimum tax, one-quarter of all capital gains are added back to the individual's income as otherwise determined. Chauvco Shareholders who elect to receive Exchangeable Shares (either together with or in substitution for shares of Pioneer Common Stock) in consideration for their Chauvco Common Shares will be entitled to make an election as described below with Pioneer Canada under subsection 85(1) of the Canadian Tax Act to defer the recognition of all or a portion of any taxable capital gain arising on the disposition. Absent the making of such an election, Chauvco Shareholders who elect to receive Exchangeable Shares will recognize a capital gain (or a capital loss) in an amount equal to the difference between (i) the aggregate fair market value of the CRI Shares, Exchangeable Shares and shares of Pioneer Common Stock and the amount of any Cash Payment so received, and (ii) the aggregate adjusted cost base of their Chauvco Common Shares so transferred and reasonable costs of disposition. Such holders will be required to include in income any such capital gain or capital loss in the manner and subject to the rules described above, and will be deemed to have acquired their CRI Shares, Exchangeable Shares and shares of Pioneer Common Stock at a cost equal to the respective fair market value of such securities. Chauvco believes that the Voting Rights and Exchange Rights received and any Call Rights deemed to be conveyed to Pioneer by Chauvco Shareholders pursuant to the Arrangement who elect to receive Exchangeable Shares will have only nominal value and, therefore, that their receipt or conveyance, as the case may be, will not result in any material Canadian income tax consequences. While joint Canadian tax counsel believes it is unlikely, Revenue Canada could take the position that the Voting Rights, Exchange Rights and Call Rights have greater than nominal value, in which case the amount of any capital gain realized by a Chauvco Shareholder who elects to receive Exchangeable Shares will be increased. If Revenue Canada successfully asserts that the Voting Rights and Exchange Rights received by a Chauvco Shareholder have more than a nominal value, those rights will have a cost equal to such amount. If Revenue Canada successfully asserts that a holder of the Exchangeable Shares has received consideration for granting the Call Rights, the holder will have a capital gain equal to the amount of the consideration received. In general terms, any such capital gain realized should reduce the amount of capital gain that the holder will otherwise realize on a later disposition of the Exchangeable Shares. Subsection 85(1) Tax Elections. Pioneer Canada has agreed that it will jointly elect under subsection 85(1) of the Canadian Tax Act with Chauvco Shareholders who elect to receive Exchangeable Shares, so as to permit such holders to elect an amount which will be regarded as the proceeds of disposition of their Chauvco Common Shares. Where such an election is made, the elected amount cannot be (i) less than the greater of the adjusted cost base to such holders of their Chauvco Common Shares so disposed of and the aggregate fair market value of the CRI Shares and shares of Pioneer Common Stock and the amount of any Cash Payment received, and (ii) more than the aggregate fair market value of the Chauvco Common Shares so disposed of. The cost of the Exchangeable Shares acquired will be the difference between the amount elected and the aggregate fair market value of CRI Shares and shares of Pioneer Common Stock and the amount of any Cash Payment received by the Chauvco Shareholder on the transfer. A capital gain (or capital loss) will be realized to the extent that the proceeds (the elected amount) deemed to have been received for the Chauvco Common Shares, net of any reasonable costs associated with the disposition, exceed (or are less than) the adjusted cost base to the holder of such Chauvco Common Shares. A Chauvco Shareholder will be required to include in income any such capital gain or capital loss in the manner and subject to the rules described above. The cost of the CRI Shares and shares of Pioneer Common Stock received will be equal to the fair market value of such securities. 65 75 Chauvco Shareholders who wish to make an election under subsection 85(1) of the Canadian Tax Act should obtain from any Revenue Canada District Taxation Office two copies of the current election forms. It will be the responsibility of each Chauvco Shareholder who wishes to make an election under subsection 85(1) of the Canadian Tax Act to complete all portions of the forms which are applicable, especially the number and adjusted cost base of the Chauvco Common Shares disposed of and the agreed amount, to sign the forms where required and to forward the signed forms to Pioneer Canada within 90 days following the Effective Time. Thereafter, subject to the forms complying with the provisions of the Canadian Tax Act, the forms will be signed by Pioneer Canada and returned to the Chauvco Shareholder for filing by the Chauvco Shareholder with Revenue Canada. Chauvco Shareholders should consult with their own tax advisors to determine whether any separate election forms must be filed with any provincial taxing authority. Each Chauvco Shareholder who wishes to make an election under subsection 85(1) of the Canadian Tax Act, or under any provincial legislation, should submit the necessary forms to Pioneer Canada as soon as possible and, in any event, within 90 days following the Effective Time. Pioneer Canada will not be liable for any loss or damage resulting from the late filing of any election form received by Pioneer Canada or from the invalidation of any election form unless such validation is solely attributable to any act or omission of Pioneer Canada. CHAUVCO SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM OF THE RECOGNITION OF A CAPITAL GAIN AS A RESULT OF THE TRANSFER OF THEIR CHAUVCO COMMON SHARES TO PIONEER CANADA. UNLESS A HOLDER ELECTS TO RECEIVE EXCHANGEABLE SHARES AND MAKES AN ELECTION UNDER SUBSECTION 85(1) OF THE CANADIAN TAX ACT, A CAPITAL GAIN MAY BE REALIZED. Dividends Paid on Exchangeable Shares. A shareholder who is an individual will include dividends received or deemed to be received on the Exchangeable Shares in computing the shareholder's income, and will be subject to the gross-up and dividend tax credit rules normally applicable to taxable dividends received from taxable Canadian corporations. Subject to the special rules described below, in the case of a shareholder that is a corporation, dividends received or deemed to be received on the Exchangeable Shares will normally be deductible in computing its taxable income. A shareholder that is a "private corporation" (as defined in the Canadian Tax Act), or any other corporation resident in Canada and controlled or deemed to be controlled by or for the benefit of an individual or a related group of individuals, may be liable under Part IV of the Canadian Tax Act to pay a refundable tax of 33 1/3% on dividends received or deemed to be received on the Exchangeable Shares to the extent that such dividends are deductible in computing the shareholder's taxable income. Special rules will apply to certain corporations that receive dividends on the Exchangeable Shares: (a) In the case of a shareholder that is a specified financial institution, a dividend received on its Exchangeable Shares will be deductible in computing its taxable income only if either: (i) the specified financial institution did not acquire the Exchangeable Shares in the ordinary course of the business carried on by such institution; or (ii) at the time of the receipt of the dividend by the specified financial institution, the Exchangeable Shares are listed on a prescribed stock exchange in Canada (which currently includes the TSE) and the specified financial institution, either alone or together with persons with whom it does not deal at arm's length, does not receive (or is not deemed to receive) dividends in respect of more than 10% of the issued and outstanding Exchangeable Shares. (b) If Pioneer Canada or any person with whom Pioneer Canada does not deal at arm's length is a "specified financial institution" under the Canadian Tax Act when a dividend is paid on an Exchangeable Share, then dividends received or deemed to be received by a shareholder that is a corporation may not be deductible in computing taxable income but, instead, may be fully included in taxable income under Part I of the Canadian Tax Act. Pioneer Canada has informed joint Canadian tax counsel that it is of the view that 66 76 neither it nor any person with whom it does not deal at arm's length is a specified financial institution at the current time, but there can be no assurances that this status will not change prior to any dividend which is received or deemed to be received by a corporate shareholder. The Exchangeable Shares will be "taxable preferred shares" and "short-term preferred shares" for purposes of the Canadian Tax Act. Accordingly, Pioneer Canada will be subject to a 66 2/3% tax under Part VI.1 of the Canadian Tax Act on dividends, other than excluded dividends, paid or deemed to be paid on the Exchangeable Shares. Dividends received or deemed to be received on the Exchangeable Shares will not be subject to the 10% tax under Part IV.1 of the Canadian Tax Act applicable to certain corporations. In the event the IRS imposes U.S. withholding tax with respect to dividends paid on the Exchangeable Shares as set out in "-- United States Federal Income Tax Considerations -- Non-US Holders -- Dividends," it is unlikely that a Canadian resident Chauvco Shareholder will be entitled to a foreign tax credit in Canada with respect to such U.S. withholding tax. Redemption or Exchange of Exchangeable Shares. The disposition of an Exchangeable Share for a share of Pioneer Common Stock will be a taxable transaction. A disposition can occur as a redemption by Pioneer Canada or as an acquisition by Pioneer. The Canadian federal income tax consequences of a redemption differ from those of an acquisition. A holder exercising the right of retraction in respect of an Exchangeable Share cannot control whether the share will be acquired by Pioneer under the Retraction Call Right or redeemed by Pioneer Canada if the Retraction Call Right is not exercised; however, a holder who exercises the right of retraction will be notified if the Retraction Call Right will not be exercised by Pioneer and the holder may cancel the Notice of Retraction and retain the Exchangeable Share. The following explains the tax treatment to a holder of an Exchangeable Share on a redemption by Pioneer Canada and an acquisition by Pioneer. (a) On a redemption (including a retraction) of an Exchangeable Share by Pioneer Canada, a portion of the redemption proceeds may be deemed to be a dividend received by the holder. The deemed dividend is calculated as the amount, if any, by which the redemption proceeds exceeds the paid-up capital at that time of the Exchangeable Share. The deemed dividend is subject to the tax treatment accorded to dividends described above. Pioneer Canada is required to calculate the deemed dividend and report the amount to the holder of the Exchangeable Share. The holder of the Exchangeable Share may also have a capital gain or capital loss as a result of the redemption. The holder of the Exchangeable Share is considered to have disposed of the Exchangeable Share for proceeds of disposition equal to the redemption proceeds less the amount of the deemed dividend. In the case of a shareholder that is a corporation, in some circumstances the amount of any deemed dividend may be treated as proceeds of disposition, and not as a dividend, for purposes of calculating a capital gain. (b) On the acquisition of an Exchangeable Share by Pioneer, the holder will in general realize a capital gain (or a capital loss) equal to the amount by which the proceeds of disposition of the Exchangeable Share, less any reasonable cost of disposition, exceed (or are less than) the adjusted cost base to the holder of the Exchangeable Share. A holder will be required to include in income any such capital gain or capital loss in the manner and subject to the rules described above. The acquisition of an Exchangeable Share by Pioneer will not result in a deemed dividend to the holder of the Exchangeable Share. The redemption proceeds in the case of a redemption by Pioneer Canada and the proceeds of disposition in the case of an acquisition by Pioneer will be the fair market value of a share of Pioneer Common Stock at the time of the disposition plus the amount of all declared but unpaid dividends on the Exchangeable Share. The cost base of a share of Pioneer Common Stock received on the retraction, redemption or exchange of an Exchangeable Share will be equal to the fair market value of the share of Pioneer Common Stock at the time of such event. 67 77 The following example illustrates the different treatment for a redemption by Pioneer Canada and an acquisition by Pioneer, assuming hypothetically that the fair market value of the Pioneer Common Stock at the time of an exchange is $50.00, the Exchangeable Shares have a paid-up capital at that time of $5.00 per share and the adjusted cost base to the holder of the Exchangeable Share is $10.00.
ACQUISITION REDEMPTION ----------- ---------- Exchange Consideration...................................... $50.00 $50.00 Deemed Dividend(a).......................................... (b) 45.00 Proceeds of Disposition for capital gains purposes.......... 50.00 5.00 Adjusted Cost Base.......................................... 10.00 10.00 ------ ------ Capital Gain (Capital Loss)(a).............................. $40.00 $(5.00) ====== ======
- --------------- (a) These line items (being the deemed dividend and the capital gain (or capital loss)) must be reported by the former holder of the Exchangeable Share. (b) There is no deemed dividend in the case of an acquisition of the Exchangeable Shares by a person other than Pioneer Canada. Dividends on CRI Shares and Pioneer Common Stock. Dividends paid on CRI Shares and shares of Pioneer Common Stock will be included in the recipient's income for the purposes of the Canadian Tax Act. Such dividends received by an individual shareholder will not be subject to the gross-up and dividend tax credit rules in the Canadian Tax Act. A corporation which is a shareholder will include such dividends in computing its taxable income. United States or other foreign non-resident withholding tax on such dividends will be eligible for foreign tax credit or deduction treatment where applicable under the Canadian Tax Act. Special considerations may also apply to the receipt of dividends by a Canadian resident shareholder at a time when either CRI or Pioneer, as the case may be, is a "foreign affiliate" of the corporate shareholder within the meaning of the Canadian Tax Act. Disposition of CRI Shares and Pioneer Common Stock. A disposition or deemed disposition of a CRI Share and a share of Pioneer Common Stock by a holder will generally result in a capital gain (or capital loss) equal to the amount by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base to the holder of the share. Such holders will be required to include in income any such capital gain or capital loss in the manner and subject to the rules described above. Eligibility for Investment Qualified Investments. Provided the CRI Shares, Exchangeable Shares and the shares of Pioneer Common Stock are listed on a prescribed stock exchange (which currently includes the TSE and the NYSE), such securities will be qualified investments under the Canadian Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans. The Voting Rights and Exchange Rights will not be qualified investments under the Canadian Tax Act. However, as indicated above, Chauvco is of the view that the fair market value of these rights is nominal. Foreign Property. Provided the Exchangeable Shares are listed on a prescribed stock exchange in Canada (which currently includes the TSE) and Pioneer Canada continues to maintain a substantial presence in Canada, the Exchangeable Shares will not be foreign property under the Canadian Tax Act for trusts governed by registered pension plans, registered retirement savings plans, registered retirement income funds and deferred profit sharing plans or for certain other tax-exempt persons. Pioneer Canada will be considered to have a substantial presence in Canada if it satisfies certain asset tests or if it maintains an office in Canada and Pioneer Canada, or a corporation controlled by it, employs more than five employees in Canada full time in the active conduct of a business, other than an investment activity or a business carried on through a partnership of which the corporation is not a majority interest partner. Chauvco has informed joint Canadian tax counsel that following the Arrangement, Pioneer Canada will satisfy this substantial presence test and expects that Pioneer Canada will continue to satisfy the test. 68 78 The CRI Shares and the shares of Pioneer Common Stock will be foreign property under the Canadian Tax Act as will the Voting Rights and Exchange Rights. Dissenting Chauvco Shareholders A dissenting Chauvco Shareholder will realize a deemed dividend and a capital gain (or a capital loss) based on the consideration received for its Chauvco Common Shares, computed as generally described above in the case of a redemption (including a retraction) of an Exchangeable Share by Pioneer Canada for a share of Pioneer Common Stock under "Redemption or Exchange of Exchangeable Shares." Dissenting Chauvco Shareholders should consult their own tax advisors in respect of the treatment of such deemed dividends. Additional income tax considerations may be relevant to dissenting Chauvco Shareholders who fail to perfect or withdraw their claims pursuant to the right of dissent. Chauvco Shareholders Not Resident in Canada The following portion of the summary is applicable to Chauvco Shareholders who, for purposes of the Canadian Tax Act, are neither resident in Canada nor deemed to be resident in Canada and who do not use or hold and are not deemed to use or hold their Chauvco Common Shares in carrying on a business in Canada (referred to hereinafter as a "Non-Resident Holder"). Under the Arrangement, Non-Resident Holders will not be entitled to elect to receive Exchangeable Shares and will instead transfer their Chauvco Common Shares to Pioneer Canada in consideration for CRI Shares and shares of Pioneer Common Stock (and possibly a Cash Payment). A Non-Resident Holder will only be subject to taxation in Canada in respect of the disposition of Chauvco Common Shares if such shares constitute "taxable Canadian property" (within the meaning of the Canadian Tax Act). Generally, the Chauvco Common Shares will not be taxable Canadian property unless the holder uses or holds, or is deemed to use or hold, the Chauvco Common Shares in connection with carrying on a business in Canada or the holder, either alone or together with persons with whom the holder does not deal at arm's length, has owned (or had under option) 25% or more of the issued shares of any class or series of the capital stock of Chauvco at any time within five years preceding the date of the disposition. A Non-Resident Holder will not generally be subject to tax under the Canadian Tax Act on a disposition of the CRI Shares or the shares of Pioneer Common Stock unless at the time of the disposition the shares are not listed on a prescribed stock exchange in Canada and more than 50% of the value of such shares is derived directly or indirectly from real property situated in Canada or Canadian resource property. Similarly, Non-Resident Holders will not be subject to tax under the Canadian Tax Act on dividends paid on the CRI Shares or the shares of Pioneer Common Stock. Chauvco Optionholders Under the Arrangement, Chauvco Optionholders will transfer their Chauvco Options to Pioneer Canada in consideration for CRI Shares and shares of Pioneer Common Stock. Chauvco Optionholders who are residents of Canada for the purposes of the Canadian Tax Act should be subject to tax in Canada on three-quarters of the difference between (a) the aggregate fair market value of the CRI Shares and the shares of Pioneer Common Stock received, and (b) the amount, if any, of the Option Payment made by Pioneer Canada. UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS This section discusses certain material U.S. tax considerations to Chauvco Shareholders who receive CRI Shares and either Pioneer Common Stock or Exchangeable Shares pursuant to the Arrangement, but it does not purport to be a complete analysis of all the potential tax effects thereof. Unless otherwise indicated, "U.S. tax" means United States federal income tax under the Internal Revenue Code of 1986 (the "U.S. Code"). This discussion is based on the law in effect as of the date of this Joint Proxy Statement. The legal conclusions contained herein represent the opinion of Baker & Botts, L.L.P., United States counsel to 69 79 Chauvco. No advance income tax ruling has been sought or obtained from the United States Internal Revenue Service (the "IRS"), and there can be no assurance that the IRS will not successfully challenge certain of the conclusions reached in this discussion, particularly those as to which uncertainty is indicated. Except as specifically stated otherwise, the discussion does not address state, local, or foreign taxes or federal tax aspects other than United States federal income taxation under the U.S. Code, nor does it address all aspects of such tax that may be applicable to the specific circumstances of a particular Chauvco Shareholder. The discussion may not apply to Chauvco Shareholders that are subject to special provisions of the U.S. Code, such as tax-exempt organizations, financial institutions, insurance companies, broker-dealers, persons having a "functional currency" other than the United States dollar, Chauvco Shareholders who hold Chauvco Common Shares as part of a straddle, wash sale, hedging or conversion transaction (other than by virtue of their participation in the Arrangement), and Chauvco Shareholders who acquired their Chauvco Common Shares through the exercise of employee stock options or otherwise as compensation for services. EACH CHAUVCO SHAREHOLDER IS URGED TO CONSULT WITH A TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF PIONEER COMMON STOCK, CRI SHARES, AND EXCHANGEABLE SHARES. U.S. Holders General. This subsection is addressed to U.S. Holders that hold Chauvco Common Shares as capital assets and who do not receive any Exchangeable Shares. For purposes of the foregoing, a U.S. Holder means (a) a citizen or individual resident of the United States, (b) a corporation or partnership created or organized in or under the laws of the United States or any state thereof, (c) an estate the income of which is includible in its gross income for United States federal income tax purposes without regard to its source, or (d) a trust as to which a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust. To simplify the discussion, masculine pronouns will be used to refer to a single U.S. Holder unless the discussion specifically refers to a U.S. Holder that is not an individual. Exchange of Chauvco Common Shares. Assuming that Chauvco was not at any relevant time classified as a PFIC as defined below under the heading "Passive Foreign Investment Company Considerations," each U.S. Holder will recognize capital gain or loss in an amount equal to the difference between his basis in the Chauvco Common Shares surrendered and the sum of the fair market value of the Pioneer Common Stock and CRI Shares and the cash (if any) received in exchange therefor. For U.S. tax credit purposes, any gain realized by a U.S. Holder will generally be treated as U.S. source, except that, if under the income tax treaty between the United States and Canada (the "Tax Treaty") any Canadian tax is imposed on the exchange, the gain would be treated as Canadian source at the election of the U.S. Holder. As a result, the Canadian tax would generally be available as a credit against the U.S. tax attributable to such gain. Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the maximum capital gains rate for individuals has been reduced to 20% for Chauvco Common Shares held for more than 18 months before the exchange, but the applicable rate will depend upon the holding period for the U.S. Holders of Chauvco Common Shares, other taxable income, and other factors. For purposes of computing gain or loss, and whether short-term or long-term, on any subsequent disposition of Pioneer Common Stock or CRI Shares, the U.S. Holder will have a tax basis in each share equal to its fair market value on the date of receipt, and will have a holding period in the shares that begins on the day after the date of receipt. Dissenters. A U.S. Holder who exercises a right to dissent from the Arrangement will recognize capital gain or loss on the exchange of Chauvco Common Shares for cash in an amount equal to the difference between the amount of cash received and his basis in the Chauvco Common Shares, except that a portion of the amount received may be classified as interest for U.S. tax purposes. 70 80 Ownership and Disposition of CRI Shares. Assuming that CRI is also not a PFIC for any year, dividends paid to a U.S. Holder with respect to CRI Shares generally will constitute ordinary dividend income to the extent paid out of CRI's earnings and profits as determined under U.S. tax principles. The amount of a dividend paid in non-U.S. currency will be calculated by reference to the exchange rate in effect on the date the dividend is distributed. Foreign currency gain or loss may be realized on any currency received that is not converted into United States dollars on such date. Dividends will generally be treated as foreign source passive income for foreign tax credit limitation purposes. Any foreign tax imposed on such dividends will generally be allowable either as a credit against the holder's U.S. tax liability (subject to applicable limitations) or as a deduction in computing U.S. taxable income. Gain or loss recognized on the disposition of CRI Shares will generally be treated as U.S. source for U.S. tax purposes. Passive Foreign Investment Company Considerations. For U.S. tax purposes, a corporation is classified as a passive foreign investment company ("PFIC") for each taxable year in which either (a) 75 percent or more of its gross income is passive income (as defined for U.S. tax purposes) or (b) on average for such taxable year, 50 percent or more in value of its assets produce passive income or are held for the production of passive income. For purposes of applying the foregoing tests, a corporation is deemed to own the assets and receive the gross income of its significant subsidiaries. Chauvco believes that it did not constitute a PFIC for any year ending upon or prior to the Arrangement, but it has not sought an opinion of counsel to that effect. CRI will endeavor to avoid PFIC status, but there can be no assurance that it will succeed in doing so. If CRI believes that it has become a PFIC for a taxable year, it will endeavor so to notify U.S. Holders of CRI Shares. If a corporation is a PFIC at any time in which a U.S. Holder owns its shares and has not elected ("QEF Election") to treat the corporation as a qualified electing fund, the gain recognized on the disposition of such shares is taxed as ordinary income at rates that might be higher than those otherwise applicable and an interest charge is imposed on such gain. The general effect of a QEF Election is to require the U.S. Holder's pro rata share of the corporation's income for each taxable year in which the corporation is classified as a PFIC to be included in his taxable income, even if no dividend distributions are received. The holder, however, can also elect to defer payment of the taxes on such income, subject to an interest charge, until the shares are transferred or a distribution on such shares is received. In addition, it is possible that under the 1997 Act a U.S. Holder will be permitted beginning in 1998 to make a mark-to-market election with respect to shares of a PFIC in lieu of incurring the special tax and interest charge on disposition of those shares. Non-U.S. Holders General. This subsection addresses the U.S. tax consequences of owning and disposing of Exchangeable Shares, Pioneer Common Stock, and CRI Shares by Chauvco Shareholders who are not U.S. Holders ("Non-U.S. Holders"). It is expected that most Chauvco Shareholders who, for purposes of the Canadian Tax Act, are resident or deemed to be resident in Canada will be Non-U.S. Holders. A Non-U.S. Holder seeking benefits under an applicable tax treaty or an exemption from U.S. withholding tax for "effectively connected income," as described below, may be required to comply with additional certification and other requirements in order to establish his entitlement to such benefits or exemption. This discussion does not consider U.S. tax consequences that may be relevant to a Non-U.S. Holder who is a United States expatriate or who has other special facts and circumstances. Dividends. Dividends received by a Non-U.S. Holder with respect to Pioneer Common Stock that are not effectively connected with the conduct of a trade or business in the United States will generally be subject to U.S. withholding tax. The U.S. withholding tax rate is 30% unless reduced by treaty. Under the Tax Treaty, the rate currently is 15 percent, generally, on dividends paid to residents of Canada. With exceptions that CRI does not expect to be applicable, dividends on the CRI Shares will not be subject to U.S. withholding tax. Neither Pioneer Canada nor Pioneer intends to withhold any amount for U.S. withholding tax on dividends paid to Non-U.S. Holders of Exchangeable Shares. There is some possibility, however, that the IRS may successfully assert that U.S. withholding tax is payable with respect to such dividends. 71 81 Gain on Dispositions. A Non-U.S. Holder generally will not be subject to U.S. tax on any gain recognized on the receipt, sale or exchange of the Exchangeable Shares, CRI Shares, or Pioneer Common Stock, unless (a) such gain is effectively connected with a trade or business in the United States, or, if a tax treaty applies, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States, or (b) the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition, and certain other conditions are satisfied. In this connection, any Non-U.S. Holder who at any time actually and constructively owns more than 5% of either the Exchangeable Shares or the Pioneer Common Stock should be aware that Pioneer is probably a "United States real property holding corporation" within the meaning of section 897 of the U.S. Code, and therefore such Non-U.S. Holder should seek advice whether his gain or loss would be deemed to be effectively connected with a U.S. business. U.S. Estate Tax. Pioneer Common Stock held by an individual Non-U.S. Holder at the time of death will be deemed to be a U.S. situs asset for purposes of U.S. estate tax law and therefore will generally be subject to the U.S. estate tax, except as may otherwise be provided by an applicable tax or estate tax treaty with the United States. No opinion is expressed as to the situs of Exchangeable Shares for purposes of U.S. estate tax law. The CRI Shares will not be considered U.S. situs assets for purposes of U.S. estate tax law. Chauvco Optionholders This section discusses certain material U.S. tax considerations to citizens or residents of the United States who hold Chauvco Options that were received as compensation for services ("U.S. Optionholders") and who receive Pioneer Common Stock, CRI Shares, and the Cash Payment and cash (if any) upon the transfer of Chauvco Options pursuant to the Arrangement. It is assumed that U.S. Optionholders will hold such Pioneer Common Stock and CRI Shares as capital assets. As used in this section, the term "U.S. tax" means United States federal income tax under the U.S. Code. The discussion is based on the law in effect as of the date of this Joint Proxy Statement. The legal conclusions contained herein represent the opinion of Baker & Botts, L.L.P. No advance income tax ruling has been sought or obtained from the IRS. The discussion does not address state, local, or foreign taxes or federal tax aspects other than United States federal income taxation under the U.S. Code, nor does it address all aspects of such tax that may be applicable to the specific circumstances of a particular U.S. Optionholder. EACH U.S. OPTIONHOLDER IS URGED TO CONSULT WITH A TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN TAX CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF PIONEER COMMON STOCK AND CRI SHARES. U.S. Optionholders will recognize ordinary income, taxable as compensation, upon the receipt of Pioneer Common Stock, CRI Shares, and the Cash Payment and cash (if any) pursuant to the Arrangement. The amount of such income will be the fair market value of the Pioneer Common Stock and CRI Shares, increased by the Cash Payment and any cash received and reduced, in the case of a U.S. Optionholder who elects to make the Option Payment, by the amount of the Option Payment. Under certain circumstances, all or a portion of such income may be excludible under section 911 of the U.S. Code. To the extent that the income is not so excludible, Canadian tax imposed on such income may be available as a credit against the U.S. tax attributable to the income. U.S. Optionholders should consult their own tax advisors with respect to these matters. The basis to the U.S. Optionholder of the Pioneer Common Stock and CRI Shares will be their fair market value on the date of receipt, and the holding period will begin on the day after such date. Gain recognized by a U.S. Optionholder on a subsequent disposition of the Pioneer Common Stock will be capital gain. Under the 1997 Act, the maximum capital gains rate for individuals has been reduced to 20% for Pioneer Common Stock held for more than 18 months before the disposition, but the applicable rate will depend upon the holding period for the Pioneer Common Stock, other taxable income, and other factors. Considerations as to the ownership and disposition by U.S. Optionholders of CRI Shares are the same as those applicable to 72 82 U.S. Holders. See "United States Federal Income Tax Considerations -- U.S. Holders -- Ownership and Disposition of CRI Shares." BUSINESS OF PIONEER GENERAL Pioneer was formed in April 1997 as a Delaware corporation and, prior to August 7, 1997, had not conducted any significant activities. Effective as of August 7, 1997, Parker & Parsley, formerly a Delaware corporation, and Mesa, formerly a Texas corporation, completed their business combination pursuant to an Amended and Restated Agreement and Plan of Merger dated as of April 6, 1997 (the "Merger Agreement"), among Parker & Parsley, Mesa, and its wholly-owned subsidiaries, Pioneer and Mesa Operating Co., a Delaware corporation ("MOC"). Upon the terms and subject to the conditions of the Merger Agreement, (a) Mesa merged with and into Pioneer, with Pioneer being the surviving corporation, and (b) Parker & Parsley merged with and into a wholly-owned subsidiary of Pioneer, Pioneer Natural Resources USA, Inc., a Delaware corporation, formerly known as MOC ("Pioneer USA"), with Pioneer USA being the surviving corporation (collectively, the "Parker/Mesa Merger"). Pioneer's business activities are conducted through wholly-owned subsidiaries and are comprised of the business activities formerly conducted by Parker & Parsley and Mesa. More than 90% of Pioneer's assets are held by Pioneer USA. Domestic drilling and production operations are principally located in Texas, Kansas, Oklahoma, Louisiana, New Mexico and offshore Gulf of Mexico. International drilling and production operations are located in Argentina and Guatemala. Pioneer is a corporation governed by the DGCL and its principal executive office is located at 1400 Williams Square West, 5205 N. O'Connor Blvd., Irving, Texas 75039 (telephone number 972-444-9001). OVERVIEW OF THE PIONEER ENTERPRISE THE INFORMATION INCLUDED UNDER THIS HEADING "OVERVIEW OF THE PIONEER ENTERPRISE" IS AS OF DECEMBER 31, 1996, GIVES EFFECT TO THE COMBINATION OF PARKER & PARSLEY AND MESA (INCLUDING GIVING EFFECT TO THE GREENHILL ACQUISITION), AND IS ON A PRO FORMA BASIS GIVING EFFECT TO THE TRANSACTION AS IF IT HAD OCCURRED ON DECEMBER 31, 1996. The Transaction will strengthen Pioneer's status as a preeminent independent oil and gas company by combining Pioneer's long-lived, low cost oil and gas reserves and gas processing facilities with Chauvco's high quality reserves, significant growth potential and international assets and prospects. After the Transaction, Pioneer will be the second largest independent oil and gas exploration and production company in the United States, based on total proved reserves, with a balanced oil and gas reserve base and significant production and reserve growth potential. Led by a proven management team, Pioneer will continue to have the financial strength and flexibility to pursue an aggressive growth strategy through a coordinated balance of exploitation, exploration and acquisition activities. Pioneer's principal strengths and strategies are the following: Reserves and Operating Areas - Pioneer has 703 MMBOE of reserves, comprised of 2.3 Tcf of natural gas and 315 MMBbls of crude oil and liquids, 85% of which are concentrated in the United States, principally the MidContinent region and Texas. Outside the United States, Pioneer has core operating areas in western Canada and Argentina which account for 6% and 9% of proved reserves, respectively. - Pioneer's reserve base is long-lived, with an aggregate reserve to production ratio of approximately 12 years, and well-balanced, with 55% natural gas and 45% crude oil and liquids. 73 83 - Pioneer operates wells representing approximately 80% of its total proved reserves and is a dominant operator in the United States, in the Hugoton, West Panhandle and Spraberry fields. Pioneer also operates in western Canada and Argentina. Drilling and Growth Opportunities - Pioneer has approximately 4,700 drilling locations, of which approximately 3,000 are in the United States, primarily in west Texas and along the Texas and Louisiana coasts, and approximately 1700 are in western Canada and Argentina. - Pioneer has approximately 2.2 million net undeveloped acres, of which approximately 700,000 are located in the United States and approximately 1.5 million are located in western Canada and Argentina. - Pioneer expects to invest 25% of its 1998 capital expenditure budget in exploration activities, with the balance to be invested in development drilling and exploitation activities. Management - Pioneer's management team is led by Jon Brumley and Scott Sheffield. Mr. Brumley is the Chairman of the Board and Mr. Sheffield is the President and Chief Executive Officer. Both Mr. Brumley and Mr. Sheffield are proven leaders in the industry, with well established records of successfully building oil and gas companies. - The Pioneer Board will be enhanced and expanded to 16 members by the addition of Guy Turcotte, Chauvco's Chief Executive Officer (subject to Pioneer Stockholder approval), and James Baroffio, a member of the Chauvco Board, both of whom are experienced leaders in the exploration and production industry. - With inside ownership of 17%, the Pioneer Board's and management team's interests in creating value are aligned with those of its stockholders. Objectives and Growth Strategy - Increasing stockholder value. Pioneer's five-year growth goal is to increase stockholder value by doubling operating cash flow through increases in production. Although Pioneer's management team believes it can reach this goal, there can be no assurances that cash flow from operations will double or increase at all. See "Risk Factors" for a discussion of certain risks associated with Pioneer's intent to pursue an aggressive growth strategy. - Development and production enhancement activities. Pioneer seeks to increase reserves and production through exploitation activities, including development drilling and recompletions in its core operating areas. - Exploration. Pioneer's exploration activities use the latest in seismic, drilling and completion technology to identify and drill sites with high reserve potential, such as those in the southern Louisiana transition zone, the Gulf of Mexico, east Texas, western Canada and Argentina. - Acquisitions. Pioneer pursues acquisitions to enhance existing core areas or to establish new core areas. Pioneer's acquisition efforts focus on opportunities to increase reserves and production through both exploitation and exploration activities with a high degree of operational control. - Increasing natural gas processing capacity in core areas. Pioneer intends to expand the processing capabilities of its gas processing facilities and will strive to obtain additional dedications of third party gas to these plants. By owning and operating these processing facilities, Pioneer retains the processing margin on the gas it produces, as well as on gas produced by third parties. - Maintaining financial strength and flexibility. Pioneer intends to maintain financial strength, flexibility and an investment grade rating for its senior debt by seeking to: (i) maintain its credit ratios 74 84 consistent with guidelines established by the major credit rating agencies for investment grade companies; (ii) fund its development and exploration activities primarily with internally generated cash flow; (iii) continue a portfolio management approach to its assets so as to direct future investments toward projects that enhance growth; (iv) use hedging strategies to reduce price risk in supporting its capital expenditure budget and its acquisition activities; and (v) reduce per unit operating and general and administrative expenditures. - Aligning the interests of its directors, officers, senior management, key technical personnel and stockholders. Pioneer believes that it is essential to align the interests of management and employees with those of its stockholders through equity based compensation plans and ownership of Pioneer Common Stock by directors, officers and employees. To attract, retain and motivate quality personnel, Pioneer utilizes the Pioneer Long-Term Incentive Plan and the Pioneer Employee Stock Purchase Plan. See "Risk Factors -- Cautionary Statement Regarding Forward-Looking Information." MANAGEMENT OF PIONEER Directors and Executive Officers Set forth below is certain information concerning the directors and executive officers of Pioneer.
DIRECTOR NAME AGE CLASS POSITION - ---- --- -------- -------- I. Jon Brumley............................. 58 III Chairman of the Board Scott D. Sheffield......................... 44 II Director, President and Chief Executive Officer Timothy L. Dove............................ 40 Executive Vice President -- Business Development Dennis E. Fagerstone....................... 48 Executive Vice President Mel Fischer................................ 63 Executive Vice President -- World Wide Exploration Mark L. Withrow............................ 49 Executive Vice President, General Counsel and Secretary Lon C. Kile................................ 41 Executive Vice President M. Garrett Smith........................... 36 Senior Vice President -- Finance R. Hartwell Gardner........................ 62 I Director John S. Herrington......................... 57 I Director Kenneth A. Hersh........................... 34 II Director James L. Houghton.......................... 66 I Director Jerry P. Jones............................. 65 II Director Boone Pickens.............................. 68 III Director Richard E. Rainwater....................... 52 III Director Charles E. Ramsey, Jr...................... 60 III Director Arthur L. Smith............................ 44 III Director Philip B. Smith............................ 45 I Director Robert L. Stillwell........................ 60 II Director Michael D. Wortley......................... 50 I Director
The Pioneer Restated Certificate provides for a classified Board of Directors, divided into three classes. The Class I directors' terms expire at Pioneer's 1998 annual stockholders' meeting, the Class II directors' terms expire at Pioneer's 1999 annual stockholders' meeting and the Class III directors' terms expire at Pioneer's 2000 annual stockholders' meeting. Each director elected at each such meeting serves for a term ending on the date of the third annual stockholders' meeting after his election or until his earlier death, 75 85 resignation or removal. The class designation of each of Pioneer's directors is indicated in the list of directors above. Set forth below is a description of the backgrounds of the directors, executive officers and advisor of Pioneer: MR. BRUMLEY, graduate of the University of Texas with a B.A. and of the Wharton School of Finance and Commerce with a M.B.A., has served as Chairman of the Board of Directors of Pioneer since August 1997. He served as Chairman of the Board of Directors and Chief Executive Officer of Mesa from August 1996 until August 1997. From 1986 to mid-1996, Mr. Brumley cofounded and served as Chairman of the Board of Directors of Cross Timbers Oil Company and from 1974 to 1985, Mr. Brumley served as President and Chief Executive Officer of Southland Royalty Company. MR. SHEFFIELD, a distinguished graduate of the University of Texas with a B.S. in Petroleum Engineering, has served as the President and Chief Executive Officer and as a director of Pioneer since August 1997. He was the President and a director of Parker & Parsley from May 1990 until August 1997 and was the Chairman of the Board and Chief Executive Officer of Parker & Parsley from October 1990 until August 1997. Mr. Sheffield was the sole director of Parker & Parsley from May 1990 until October 1990. Mr. Sheffield joined Parker & Parsley Development Company ("PPDC"), a predecessor of Parker & Parsley, as a petroleum engineer in 1979. Mr. Sheffield served as Vice President -- Engineering of PPDC from September 1981 until April 1985, when he was elected President and a director. In March 1989, Mr. Sheffield was elected Chairman of the Board and Chief Executive Officer of PPDC. Before joining PPDC's predecessor, Mr. Sheffield was employed as a production and reservoir engineer for Amoco Production Company. MR. DOVE became Executive Vice President-Business Development of Pioneer in August 1997. Mr. Dove joined Parker & Parsley in May 1994 as Vice President -- International and was promoted to Senior Vice President -- Business Development in October 1996, in which position he served until August 1997. Prior to joining Parker & Parsley, Mr. Dove was employed with Diamond Shamrock Corp., and its successor, Maxus Energy Corp, in various capacities in international exploration and production, marketing, refining and marketing, and planning and development. Mr. Dove earned a Bachelor of Science degree in Mechanical Engineering from Massachusetts Institute of Technology in 1979 and received his Masters of Business Administration in 1981 from the University of Chicago. MR. FAGERSTONE, a graduate of the Colorado School of Mines with a B.S. in Petroleum Engineering, became an Executive Vice President of Pioneer in August 1997. Mr. Fagerstone served as Executive Vice President and Chief Operating Officer of Mesa from March 1, 1997 until August 1997. From October 1996 to February 1997, Mr. Fagerstone served as Senior Vice President and Chief Operating Officer of Mesa and from May 1991 to October 1996, Mr. Fagerstone served as Vice President -- Exploration and Production of Mesa. From June 1988 to May 1991, Mr. Fagerstone served as Vice President -- Operations of Mesa. MR. FISCHER, a graduate of the University of California at Berkeley with a Masters degree in Geology, became Executive Vice President -- World Wide Exploration of Pioneer in August 1997. Mr. Fischer served as a director of Parker & Parsley from November 1995 until August 1997. Prior to joining Parker & Parsley as a director, Mr. Fischer worked in the petroleum industry for 32 years, starting as a Petroleum Geologist with Texaco in 1962, and retiring from the position of President, Occidental International Exploration and Production Company, in March, 1994. For the 10 years prior to becoming President of Occidental International, Mr. Fischer held the position of Executive Vice President, World Wide Exploration with Occidental Oil and Gas Corporation. He is a registered geologist in the State of California, a member of the American Association of Petroleum Geologists and an emeritus member of the Board of Advisors for the Earth Sciences Research Institute at the University of Utah. Effective February 1, 1997, Mr. Fischer expanded his duties with Parker & Parsley when he was appointed to serve as Executive Vice President -- World Wide Exploration for Parker & Parsley. MR. WITHROW, a graduate of Abilene Christian University with a Bachelor of Science degree in Accounting and Texas Tech University with a Juris Doctorate degree, became Executive Vice President, 76 86 General Counsel and Secretary of Pioneer in August 1997. Mr. Withrow was Vice President -- General Counsel of Parker & Parsley from January 1991, when he joined Parker & Parsley, to January 1995, when he was appointed Senior Vice President, General Counsel. He was Parker & Parsley's Secretary from August 1992 until August 1997. Before joining Parker & Parsley, Mr. Withrow was the managing partner of the law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland, Texas. MR. KILE, a graduate of Oklahoma State University with a Bachelor of Business Administration degree in Accounting, became Executive Vice President of Pioneer in August 1997. Mr. Kile joined Parker & Parsley in 1985 and was promoted to Senior Vice President -- Investor Relations in October 1996. Previously, he was Vice President and Manager of the Mid-Continent Division. Prior to that he held the position of Vice President -- Equity Finance & Analysis and Vice President -- Marketing and Program Administration. Prior to joining Parker & Parsley, he was employed as Supervisor -- Senior, Audit, in charge of Parker & Parsley's audit, with Ernst & Young. MR. SMITH (M. GARRETT), a graduate of The University of Texas with a Bachelor of Science degree in Electrical Engineering and Southern Methodist University with an M.B.A., became Senior Vice President -- Finance of Pioneer in August 1997. Mr. Smith served as Vice President -- Corporate Acquisitions of Mesa from January 1997 until August 1997. From October 1996 to December 1996, Mr. Smith served as Vice President -- Finance of Mesa and from 1994 to 1996, he served as Director of Financial Planning of Mesa. Mr. Smith was employed by BTC Partners, Inc. (a former financial advisor to Mesa) from 1989 to 1994. MR. GARDNER became a director of Pioneer in August 1997. He served as a director of Parker & Parsley from November 1995 until August 1997. He graduated from Colgate University with a B.A. in Economics and then earned a M.B.A. from Harvard University. Until October 1, 1995, Mr. Gardner was the Treasurer of Mobil Oil Corporation and Mobil Corporation from 1974 and 1976 respectively. Mr. Gardner is a member of the Financial Executives Institute of which he served as Chairman in 1986/1987 and is a Director of Oil Investment Corporation Ltd. and Oil Casualty Investment Corporation Ltd. Pembroke, Bermuda. MR. HERRINGTON, graduate of Stanford University with a B.A. in Economics and the University of California Hastings college of Law with a J.D. and L.L.B., became a director of Pioneer in August 1997. He served as a director of Mesa from January 1992 until August 1997. Since December 1991, Mr. Herrington has been involved in personal investments and real estate activities. He was Chairman of the Board of Harcourt Brace Jovanovich, Inc. (publishing) from May 1990 to November 1991 and served as a director from May 1989 to May 1990. Mr. Herrington served as the Secretary of the Department of Energy of the United States from February 1985 to May 1990. MR. HERSH, graduate of Princeton University with a B.A. and Stanford University Graduate School of Business with a MBA, became a director of Pioneer in August 1997. He served as a director of Mesa from July 1996 until August 1997. Since 1994, he has served as Chief Investment Officer and director of Rainwater, Inc. and as a Managing Partner of Natural Gas Partners investment funds. From 1989 to 1994, he served as a Managing Partner of Natural Gas Partners, L.P. and from 1985 to 1987, as a member of the energy group of Morgan Stanley & Co. investment banking division. Mr. Hersh is a director of HS Resources, Inc. and Titan Exploration Inc. MR. HOUGHTON is a certified public accountant and a graduate of Kansas University with a B.S. in Accounting, as well as a L.L.B. Mr. Houghton became a director of Pioneer in August 1997. He served as a director of Parker & Parsley from October 1991 until August 1997. Until October 1, 1991, Mr. Houghton was the lead oil and gas tax specialist for the accounting firm of Ernst & Young, was a member of Ernst & Young's National Energy Group, and had served as the Southwest Regional Director of Tax. Mr. Houghton is a member of the American Institute of Certified Public Accountants, a member of the Oklahoma Society of Certified Public Accountants and a former Chairman of its Federal and Oklahoma Taxation Committee and past President of the Oklahoma Institute on Taxation. He has also served as a Director for the Independent Petroleum Association of America and as a member of its Tax Committee. Since 1990, Mr. Houghton has served as trustee of the J.E. and L.E. Mabee Foundation, Inc. 77 87 MR. JONES earned a B.S. from West Texas State College in 1953 and a L.L.B. from the University of Texas School of Law in 1959. Mr. Jones became a director of Pioneer in August 1997. He served as a director of Parker & Parsley from May 1991 until August 1997. Mr. Jones has been an attorney with the law firm of Thompson & Knight, P.C., Dallas, Texas since September 1959 and is a shareholder in the firm. He has specialized in civil litigation, particularly in the area of energy disputes. MR. PICKENS, the founder of Mesa, is a graduate of Oklahoma State University with a B.S. in geology and served as a director of Mesa from its inception until August 1997 when he became a director of Pioneer. From January 1992 to August 1996, he served as Chairman of the Board of Directors and Chief Executive Officer. From October 1985 to December 1991, Mr. Pickens served as General Partner of Mesa, L.P., predecessor of Mesa, and as Director of Pickens Operating Co. (the corporate general partner of Mesa, L.P.). From 1964 to January 1987, Mr. Pickens served as Chairman of the Board and President of Mesa in its original corporate form. Mr. Pickens is currently the Chairman of the Board of BP Capital LLC and Pickens Fuel Corp. MR. RAINWATER, a graduate of the University of Texas with a B.A. and the Stanford University Graduate School of Business with a M.B.A., became a director of Pioneer in August 1997. He served as a director of Mesa from July 1996 until August 1997. Since 1986, Mr. Rainwater has been an independent investor and the sole shareholder, President and a director of Rainwater, Inc. Mr. Rainwater was the founder of Crescent Real Estate Equities, Inc. in 1994 and since that time has served as Chairman of the Board. He was the co-founder of Mid Ocean Limited in 1991, the founder of Columbia Hospital Corporation (predecessor to Columbia/HCA Healthcare Corporation) in 1987 and the founder of ENSCO International, Inc. in 1986. From 1970 to 1986, Mr. Rainwater served as the Chief Investment Advisor to the Bass Family of Texas. MR. RAMSEY is a graduate of the Colorado School of Mines with a Petroleum Engineering degree and a graduate of the Smaller Company Management program at the Harvard Graduate School of Business Administration. He became a director of Pioneer in August 1997. From October 1991 until August 1997, Mr. Ramsey served as a director of Parker & Parsley and began operating an independent management and financial consulting firm. From June 1958 until June 1986, Mr. Ramsey held various engineering and management positions in the oil and gas industry, and for six years prior to October 1, 1991, was a Senior Vice President in the Corporate Finance Department of Dean Witter Reynolds Inc. (Dallas, Texas office). His industry experience includes 12 years of senior management experience in the positions of President, Chief Executive Officer and Executive Vice President of May Petroleum Inc. Mr. Ramsey is also a former director of MBank Dallas, the Dallas Petroleum Club and Lear Petroleum Corporation. MR. SMITH (ARTHUR L.) has a B.A. from Duke University, and is a graduate of New York University's Stern School of Business with a M.B.A. in Economics. Mr. Smith became a director of Pioneer in August 1997. He served as a director of Parker & Parsley from August 1991 until August 1997. He is Chairman and Chief Executive Officer of John S. Herold, Inc., a petroleum research and consulting firm based in Stanford, Connecticut. Mr. Smith acquired control of John S. Herold, Inc. in 1984 after nine years on Wall Street in institutional equity research and corporate finance with Oppenheimer and Company, Inc., The First Boston Corporation and Argus Research Corp. From 1988 to 1993, he served on the Board of Directors of the New York Society of Security Analysts. Mr. Smith holds the Chartered Financial Analyst (CFA) designation. MR. SMITH (PHILIP B.), a graduate of Oklahoma State University with a B.S. in mechanical engineering and the University of Tulsa with a M.B.A., became a director of Pioneer in August 1997. He served as a director of Mesa from July 1996 until August 1997. In 1996, Mr. Smith founded PRIZE Petroleum, L.L.C. From 1991 to 1996, Mr. Smith served as President, Chief Executive Officer and a director of Tide West Oil Company. From 1986 to 1991, he served as Senior Vice President of Mega Natural Gas Company and from 1980 to 1986, he held executive positions with two small exploration and production companies. From 1976 to 1980, Mr. Smith held various positions with Samson Resources Company and from 1974 to 1976, he was a production engineer with Texaco, Inc. Mr. Smith is a director of HS Resources, Inc. 78 88 MR. STILLWELL, a graduate of the University of Texas with a B.B.A. and the University of Texas School of Law with a J.D., became a director of Pioneer in August 1997. He served as a director of Mesa from January of 1992 until August 1997, as a member of the Advisory Committee of Mesa, L.P., a predecessor Mesa, from December 1985 to December 1991 and from 1969 to January 1987, he served as a director of Mesa in its original corporate form. Mr. Stillwell has been a partner in the law firm of Baker & Botts, L.L.P. for more than the last five years. MR. WORTLEY, a graduate of Southern Methodist University with a B.A. in Political Science, the University of North Carolina at Chapel Hill with a Masters degree in Regional Planning, and Southern Methodist University School of Law with a J.D., became a director of Pioneer in August 1997. He served as a director of Parker & Parsley from April 1991 until August 1997. Mr. Wortley, a partner with the law firm of Vinson & Elkins L.L.P. (Dallas, Texas office), specializes in acquisitions and securities matters and serves as the co-head of the Corporate Finance and Securities Section of the firm. He served on the Board of Directors of Johnson & Wortley, P.C., from May 1994 until December 1994 and from April 1990 to May 1993, as President and Chairman of the Board from November 1991 to May 1993 and as the Managing Director from February 1992 to May 1993. From January 1989 until November 1991, he served as the Chairman of the Corporate/Securities Department. In addition to the directors of Pioneer, Edward O. Vetter, a graduate of the Massachusetts Institute of Technology, became a Senior Advisor to both Pioneer's Chairman and Chief Executive Officer beginning in August 1997 through at least 1998. Mr. Vetter served as a director of Parker & Parsley from February 1992 until August 1997 and has in the past served as director of AMR Corporation, American Airlines, Inc., Cabot Corporation, The Western Company of North America and Champion International Corporation. Since 1977, Mr. Vetter has been President of Edward O. Vetter & Associates, a management consulting firm in Dallas, Texas. Mr. Vetter was the Energy Advisor to the Governor of Texas from 1979 to 1983, was chairman of the Texas Department of Commerce from 1987 to 1991, and was a Presidential appointee to the U.S. Competitiveness Policy Council. He is a life trustee of the Massachusetts Institute of Technology and a former member of the National Petroleum Council. Compensation of Directors As compensation for services as a director of Pioneer, each non-employee director receives an annual retainer fee, which is paid 50% in cash and 50% in the form of Pioneer Common Stock, or at the election of the director, 100% in Pioneer Common Stock. The amount of the annual retainer fee is $40,000, or $50,000 for such directors that serve on committees. In addition, each non-employee director is reimbursed for travel expenses incurred in connection with attending meetings of the Board of Directors or its committees and an additional $2,500 for services as chairman of a committee. No additional fees are paid for attending board or committee meetings. Executive officers of Pioneer who serve as directors do not receive additional compensation for serving on the Pioneer Board. Indemnification Pioneer has entered into indemnification agreements with each of its directors and officers. These agreements require Pioneer to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law ("DGCL") and to advance expenses in connection with certain claims against directors and officers. Each indemnification agreement also provides that, upon a potential change in control or change in control of Pioneer and if the indemnified director or officer so requests, Pioneer will create a trust for the benefit of the indemnified director or officer in an amount sufficient to satisfy payment of all liabilities and suits against which Pioneer has indemnified the director or officer. See "Compensation of Executive Officers -- Pioneer Indemnification." Committees of the Board of Directors The Pioneer Board has established three standing committees: the Audit Committee, the Compensation Committee and the Executive Committee. Messrs. Herrington, Houghton, Gardner and Jones serve on the 79 89 Audit Committee, Messrs. Hersh, Ramsey, Smith (Arthur L.) and Smith (Philip B.) serve on the Compensation Committee and Messrs. Brumley, Sheffield, Hersh, Ramsey, Gardner and Smith (Philip B.) serve on the Executive Committee. The functions of the Audit Committee are to recommend to the Pioneer Board the appointment of independent auditors, to review the plan and scope of any audit of Pioneer's financial statements and to review Pioneer's significant accounting policies and other matters. The functions of the Compensation Committee are to set the compensation of all officers and to administer the Pioneer Long-Term Incentive Plan and the Pioneer Employee Stock Purchase Plan, provided where necessary to comply with certain tax and securities provisions, a subcommittee of Messrs. Ramsey, Smith (Arthur L.), Smith (Philip B.) and Gardner has been formed in order to obtain the benefit of certain tax provisions. The functions of the Executive Committee are to approve acquisition or divestiture transactions by Pioneer up to $200 million, whether in cash or Pioneer securities, and to act as a preliminary screening committee for the Pioneer Board on transactions greater than $200 million. COMPENSATION OF EXECUTIVE OFFICERS The compensation paid to Pioneer's executive officers is administered by the Compensation Committee of the Pioneer Board and generally consists of base salaries, annual bonuses, awards made pursuant to Pioneer's Long-Term Incentive Plan, contributions to the Pioneer-sponsored 401(k) retirement plan, and miscellaneous perquisites. The following table summarizes the total compensation for 1996, 1995, and 1994 awarded to, earned by or paid to the following persons (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(a)
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------- ----------------------- AWARDS OTHER ----------------------- ALL ANNUAL RESTRICTED SHARES OTHER NAME AND COMPEN- STOCK UNDERLYING COMPEN- PRINCIPAL POSITION YEAR SALARY BONUS(B) SATION(C) AWARDS(D) OPTIONS SATION(E) - ------------------ ---- -------- -------- --------- ---------- ---------- --------- Scott D. Sheffield........ 1996 $390,000 $375,375 $ 47,770 $ -- $70,000 $87,990 Chairman of the Board, 1995 321,094 -- 12,592 -- 56,232 8,260 President, and Chief 1994 330,000 165,000 69,636 6,581 -- 8,260 Executive Officer Timothy A. Leach*......... 1996 200,000 157,500 38,516 59,500 31,000 49,519 Executive Vice 1995 171,925 -- 8,992 -- 31,824 6,930 President 1994 120,000 84,000 33,409 1,763 -- 6,930 Steven L. Beal*........... 1996 175,000 133,875 33,021 59,500 25,000 41,269 Sr. Vice President, 1995 147,364 -- 7,192 -- 28,324 6,631 Chief Financial 1994 100,000 70,000 27,068 1,681 -- 4,500 Officer & Treasurer Mark L. Withrow........... 1996 175,000 201,737 33,021 59,500 21,000 43,103 Sr. Vice President 1995 157,438 -- 7,192 -- 27,743 6,930 & General Counsel 1994 144,000 72,000 20,916 2,460 -- 6,930 David A. Chroback*........ 1996 175,000 133,875 32,870 59,500 21,000 41,077 Sr. Vice President 1995 143,125 -- 6,740 -- 27,493 6,441 1994 110,000 55,000 21,926 1,312 -- 4,950 Timothy L. Dove........... 1996 160,609 190,080 30,842 59,500 21,000 38,834 Sr. Vice President 1995 133,583 -- 6,934 199,988 15,000 6,011 1994(f) 84,359 40,833 20,916 -- 12,000 --
- --------------- * Resigned during 1997. (a) See "-- Employee Investment Partnerships" for information about Company-sponsored employee investment partnerships in which the Named Executive Officers invested their own funds. 80 90 (b) Represents the amount awarded under Pioneer's annual bonus program and bonus awards related to specific events in accordance with Pioneer's executive compensation program administered by the Compensation Committee of the Pioneer Board. In 1994 the annual bonus was paid one-half in cash and one-half in restricted stock. In 1996, Mr. Sheffield received all of his bonus in cash, and all other Named Executive Officers received one-half of a previously established target level in restricted stock and the other one-half of target plus any excess above target in cash. The amounts shown in the Summary Compensation Table include both the cash and the value of restricted stock awards. The amount of cash and the number and value of shares of restricted stock awarded for each year under the annual bonus program are as follows:
RESTRICTED STOCK AWARD -------------------- CASH NUMBER VALUE OF YEAR AWARD OF SHARES SHARES ---- -------- --------- -------- Mr. Sheffield...................................... 1996 $375,375 -- $ -- 1995 -- -- -- 1994 82,500 3,529 82,500 Mr. Leach.......................................... 1996 112,493 1,494 45,007 1995 -- -- -- 1994 42,000 1,797 42,000 Mr. Beal........................................... 1996 94,502 1,307 39,373 1995 -- -- -- 1994 35,000 1,497 35,000 Mr. Withrow........................................ 1996 102,377 1,307 39,373 1995 -- -- -- 1994 36,000 1,540 36,000 Mr. Chroback....................................... 1996 94,502 1,307 39,373 1995 -- -- -- 1994 27,500 1,176 27,500 Mr. Dove........................................... 1996 93,956 1,200 36,137 1995 -- -- -- 1994 20,427 873 20,406
The number of shares of the restricted stock awarded as annual bonuses was calculated using the last closing sales price of Pioneer Common Stock before the time of the award ($30.125 for 1996 and $23.375 for 1994). Ownership of the restricted stock awarded in 1996 vests on August 13, 1997, and ownership of the restricted stock awarded in 1994 vested on March 31, 1995. Subject to accelerated lapse in certain circumstances, the transfer restrictions lapse on one-third of the shares on each of the first, second and third anniversaries of the date of grant (February 13, 1997, for 1996 awards and November 15, 1994, for 1994 awards). In 1996, Mr. Withrow and Mr. Dove each received restricted stock bonus awards of 2,436 shares valued at $59,987 on the date of grant in recognition of their critical role in the successful divestiture of Pioneer's Australasian assets. These shares vested on April 3, 1997, and transfer restrictions lapse one-third each year beginning from April 3, 1997. Dividends are paid on the restricted stock at the same rate as they are paid on all other shares of Pioneer Common Stock. 81 91 (c) Includes (i) cash payments to Mr. Sheffield equal to 50% of the federal income tax liability associated with the cash bonus received in lieu of restricted stock under the annual bonus program and cash payments to other Named Executive Officers for federal income tax liability associated with the receipt of restricted stock awards pursuant to the annual bonus program; (ii) cash payments for a portion of the federal income tax liability associated with the receipt of restricted stock pursuant to Pioneer's Performance Unit Program which was discontinued in 1995; and (iii) automobile allowances as shown below. Amounts not shown below represent miscellaneous perquisites.
FEDERAL TAX FEDERAL TAX LIABILITY- LIABILITY- ANNUAL PERFORMANCE AUTOMOBILE YEAR BONUS PROGRAM UNIT PROGRAM ALLOWANCE ---- ------------- ------------- ----------- Mr. Sheffield............................. 1996 $35,178 $ -- $10,200 1995 -- -- 10,200 1994 54,087 2,957 10,200 Mr. Leach................................. 1996 29,524 -- 6,600 1995 -- -- 6,600 1994 23,625 792 6,600 Mr. Beal.................................. 1996 25,829 -- 4,800 1995 -- -- 4,800 1994 19,121 755 4,800 Mr. Withrow............................... 1996 25,829 -- 4,800 1995 -- -- 4,800 1994 20,250 1,105 4,800 Mr. Chroback.............................. 1996 25,829 -- 4,800 1995 -- -- 4,800 1994 15,186 -- 4,800 Mr. Dove.................................. 1996 23,706 -- 4,800 1995 -- -- 4,800 1994 17,227 -- 2,800
(d) The restricted stock awarded in 1996 represents grants on November 19, 1996, to Messrs. Leach, Beal, Withrow, Chroback and Dove of 2,000 shares each of common stock with vesting restrictions that lapse November 19, 1999. The restricted stock awarded in 1995 to Mr. Dove represents a grant on June 1, 1995, of 10,389 shares of Pioneer Common Stock with vesting restrictions that lapse June 1, 1998. The restricted stock awarded in 1994 represents partial settlement of Performance Units through grants of Pioneer Common Stock on December 30, 1994, of 321 shares to Mr. Sheffield, 86 shares to Mr. Leach, 82 shares to Mr. Beal, 120 shares to Mr. Withrow and 64 shares to Mr. Chroback. Vesting of the shares was accelerated so that 50% of the shares vested on December 31, 1995, and the remaining 50% vested on December 31, 1996. The shares are subject to transfer restrictions that will lapse with respect to one-third of the shares at the end of 1998, one-third of the shares at the end of 1999 and one-third of the shares at the end of 2000. Dividends are paid on the restricted stock at the same rate as they are paid on all other shares of Pioneer Common Stock. The values of the awards were calculated using the closing sales price of Pioneer Common Stock of $29.75 on November 18, 1996, $19.25 on May 31, 1995, and $20.50 on December 30, 1994. 82 92 The total number and value of all shares of restricted stock that each executive officer held on December 31, 1996, are as follows based on the closing sales that day of $36.75:
NUMBER OF SHARES VALUE ---------------- ---------- Mr. Sheffield........................................ 54,400 $1,999,200 Mr. Leach............................................ 16,969 623,611 Mr. Beal............................................. 16,185 594,799 Mr. Withrow.......................................... 24,908 915,369 Mr. Chroback......................................... 12,181 447,652 Mr. Dove............................................. 15,116 555,513
(e) Includes (i) Pioneer contributions under Pioneer's 401(k) plan, (ii) 1996 Pioneer contributions to Pioneer's deferred compensation retirement plan for executives, (iii) deemed payment of one-third of the principal and all accrued interest related to a 1995 stock acquisition loan program and (iv) $1,330 of premiums paid in each of 1996, 1995 and 1994 with respect to term life insurance policies for the benefit of Mr. Sheffield.
401(K) EMPLOYER NON-QUALIFIED SAVINGS PLAN STOCK ACQUISITION NAME YEAR MATCH EMPLOYER MATCH LOAN AGREEMENT - ---- ---- --------------- -------------------------- ----------------- Mr. Sheffield............... 1996 $6,750 $29,250 $50,660 1995 6,930 -- -- 1994 6,930 -- -- Mr. Leach................... 1996 7,500 15,000 27,019 1995 6,930 -- -- 1994 6,930 -- -- Mr. Beal.................... 1996 7,688 6,563 27,019 1995 6,930 -- -- 1994 6,930 -- -- Mr. Withrow................. 1996 7,688 13,125 22,290 1995 6,631 -- -- 1994 4,500 -- -- Mr. Chroback................ 1996 7,688 13,125 20,264 1995 6,441 -- -- 1994 4,950 -- -- Mr. Dove.................... 1996 7,875 12,046 18,913 1995 6,011 -- -- 1994 -- -- --
(f) Mr. Dove joined Pioneer as an employee on April 28, 1994. Stock Options. The Long-Term Incentive Plan provides for employee awards in the form of stock options, stock appreciation rights, restricted stock, and Performance Units payable in stock or cash. The maximum number of shares of Pioneer Common Stock that may be issued under the Long-Term Incentive Plan is equal to 10% of the total shares of Pioneer Common Stock outstanding from time to time. The Long-Term Incentive Plan had 105,155 shares available for additional awards at December 31, 1996. 83 93 The following table sets forth information about stock option grants made during 1996 to the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS ---------------------------------- % OF TOTAL OPTIONS NUMBER OF GRANTED EXERCISE SECURITIES TO OR BASE UNDERLYING EMPLOYEES PRICE OPTIONS IN FISCAL PER SHARE EXPIRATION GRANT DATE NAME GRANTED(A) YEAR (B) DATE VALUE(C) - ---- ---------- --------- --------- ---------- ---------- Mr. Sheffield....................... 70,000 11.0% $29.75 11/19/01 $707,700 Mr. Leach........................... 31,000 4.9% 29.75 11/19/01 313,410 Mr. Beal............................ 25,000 3.9% 29.75 11/19/01 252,750 Mr. Withrow......................... 21,000 3.3% 29.75 11/19/01 212,310 Mr. Chroback........................ 21,000 3.3% 29.75 11/19/01 212,310 Mr. Dove............................ 21,000 3.3% 29.75 11/19/01 212,310
- --------------- (a) Stock options were granted under the Pioneer Long-Term Incentive Plan. The options were granted on November 19, 1996, vest at the rate of one-third each year commencing on the first anniversary of the grant date, and have a term of five years. The Compensation Committee retains discretion, subject to plan limits, to modify the terms of the options and to reprice the options. In the event of a change in control as defined in the Pioneer Long-Term Incentive Plan, each holder of an option will immediately be granted corresponding stock appreciation rights and the options will immediately become fully vested and exercisable in full. (b) The exercise price per share is equal to the closing price of Pioneer Common Stock on the NYSE composite tape on the day before the date of grant. (c) The estimated grant date value of the options is determined using the Black-Scholes model. The material assumptions and adjustments incorporated in the Black-Scholes model in estimating the value of the options include the following: - An interest rate of 6.18% which represents the interest rate on a U. S. Treasury security with a maturity date corresponding to the option term. - Volatility of 32.22% calculated using daily stock prices for the 120-day period prior to the grant date. - Dividends at the rate of $.10 per share representing the annualized dividends paid with respect to a share of common stock at the date of grant. No other adjustments were made to the model for non-transferability or risk of forfeiture. The ultimate values of the options will depend on the future market price of the Pioneer's stock, which cannot be forecast with reasonable accuracy. The actual value, if any, an optionee will realize upon exercise of an option will depend on the excess of the market value of Pioneer Common Stock over the exercise price on the date the option is exercised. 84 94 The following table sets forth, for each Named Executive Officer, information concerning the exercise of stock options during 1996 and the value of unexercised stock options as of December 31, 1996. AGGREGATED EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTIONS VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(B) ACQUIRED ON VALUE --------------------------- --------------------------- EXERCISE REALIZED(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ----------- ----------- ------------- ----------- ------------- Mr. Sheffield.............. 30,000 $541,250 66,666 103,334 $1,474,988 $1,077,512 Mr. Leach.................. 16,666 300,898 9,500 50,000 167,438 551,875 Mr. Beal................... 20,784 262,458 -- 41,666 -- 468,738 Mr. Withrow................ 12,500 147,063 4,334 37,666 76,387 440,738 Mr. Chroback............... 6,000 110,751 13,334 37,666 259,387 440,738 Mr. Dove................... -- -- 13,000 35,000 187,125 372,750
- --------------- (a) Amounts were calculated by multiplying the number of options exercised by the market price of the Pioneer's Common Stock at the time of exercise minus the exercise price. (b) Amounts were calculated by multiplying the number of unexercised options by the closing sales price of the Pioneer's Common Stock on December 31, 1996 ($36.75) minus the exercise price. Current Salaries. The 1997 salaries of the eight highest paid Pioneer executive officers are $600,000, $600,000, $285,000, $275,000, $250,000, $250,000, $250,000 and $235,000 for Messrs. Brumley, Sheffield, Fischer, Fagerstone, Dove, Withrow, Kile and Smith. Retirement Plan. Effective January 1, 1996, the Compensation Committee approved a deferred compensation retirement plan for the executive officers of the Pioneer. Each executive is allowed to contribute up to 25% of base salary. The Pioneer provides a matching contribution of 100% of the employee's contribution limited to the first 10% of the executive's base salary. The Pioneer matching contribution vests immediately. Employee Investment Partnerships. During 1994, the Pioneer formed a Direct Investment Partnership to invest in all wells drilled by the Pioneer during that year (except in certain circumstances where its participation would impose additional costs on the Company). The Pioneer had also formed Direct Investment Partnerships in 1992 and 1993. No partnerships were formed in 1995 or 1996, and the Pioneer does not expect to form any new partnerships in the future. The 1994 Direct Investment Partnership was formed in January 1994 with ten employee participants. Mr. Chroback was the only Named Executive Officer who participated. The total initial capital contributions were approximately $144,000, with the employees contributing approximately $142,600 (99%) and the managing general partner contributing approximately $1,400 (1%). The partnership pays .34% of the costs and receives .34% of the revenues attributable to the Company's interest in the wells in which the partnership participates. Mr. Chroback contributed $11,167 and has received distributions of $9,184 since the partnership formation. The Direct Investment Partnership program replaced prior employee partnership programs that had been sponsored by the Pioneer and its predecessors during 1987 through 1991. As of December 31, 1996, the aggregate contributions that have been made to those partnerships and the Direct Investment Partnerships by the Named Executive Officers and the aggregate distributions that have been received by the Named Executive Officers from those partnerships are as follows: Mr. Sheffield contributed $643,334 and received $782,323 ($156,648 of which was received during 1996); Mr. Leach contributed $361,255 and received $394,798 ($75,397 of which was received during 1996); Mr. Withrow contributed $120,673 and received $91,716 ($21,330 of which was received during 1996); Mr. Beal contributed $169,573 and received $219,264 ($40,014 of which was received during 1996); and Mr. Chroback contributed $80,667 and received $77,858 ($16,654 of which was received during 1996). 85 95 Pioneer Severance Agreements. At the closing of the Parker/Mesa Merger, Pioneer entered into a Severance Agreement (each, a "Pioneer Severance Agreement") with each person who is a current officer of Pioneer. The definition of "Change in Control" under a Pioneer Severance Agreement means the occurrence of one or more of the following: (i) a person other than Pioneer or certain affiliated companies or benefit plans becomes the beneficial owner of 20% or more of the voting power of Pioneer's outstanding voting securities (except acquisitions from Pioneer or in a transaction meeting the requirements of the parenthetical exception in clause (iii) below); (ii) a majority of the Board of Directors of Pioneer is not comprised of the members of the Board of Directors of Pioneer immediately following the Parker/Mesa Merger and persons whose elections as directors were approved by those directors or their approved successors; (iii) Pioneer merges or consolidates with another corporation or entity (whether Pioneer or the other entity is the survivor), or Pioneer and the holders of the voting securities of such other corporation or entity (or the stockholders of Pioneer and such other corporation or entity) participate in a securities exchange (other than a merger, consolidation or securities exchange in which Pioneer's voting securities are converted into or continue to represent securities having the majority of voting power in the surviving company, in which no person other than that surviving company owns 20% or more of the outstanding shares of common stock or voting shares of the surviving corporation (except persons whose ownership of that amount results solely from their ownership in Pioneer before that transaction), and in which at least a majority of the board of directors of the surviving corporation were members of the incumbent board of Pioneer); (iv) Pioneer liquidates or sells all or substantially all of its assets, except sales to entity having substantially the same ownership as Pioneer; or (v) consummation of a business combination not otherwise constituting a change in control but pursuant to which the Chief Executive Officer is removed from, or replaced in, such capacity with respect to the corporation resulting from the business combination. The definition of a "Termination for Good Reason" under a Pioneer Severance Agreement means a termination of employment by the officer within 30 days following notice of (i) the demotion of the officer to a non-officer position or to an officer position junior to the position specified in the relevant Pioneer Severance Agreement, (ii) a reduction in such officer's base annual salary which exceeds certain limits, or (iii) the failure by Pioneer to obtain from certain of its successors an agreement to assume its obligations under the Pioneer Severance Agreement. Each Pioneer Severance Agreement executed by such Mesa officer provides that (i) Pioneer assumed Mesa's obligation under the Mesa Severance Plan to pay a severance benefit upon the termination of such Mesa officer's employment within one year after consummation of the Parker/Mesa Merger, and (ii) the Pioneer Severance Agreement superseded and replaced all other terms and provisions of the Mesa Severance Plan, except for the right to receive such payment. Each Pioneer Severance Agreement executed by an officer of Parker & Parsley provided that (i) Pioneer assumed Parker & Parsley's obligation under such officer's Parker & Parsley Severance Agreement to make certain payments upon the termination of such officer's employment within one year after consummation of the Parker & Parsley Merger, and (ii) the Pioneer Severance Agreement superseded and replaced all other terms and provisions of the Parker & Parsley Severance Agreement to which such officer was a party, except for the right to receive such payment. In addition, unless a Change in Control of Pioneer has occurred or is pending or contemplated, beginning on the fifth anniversary of the consummation of the Parker/Mesa Merger, Pioneer can terminate or amend each Pioneer Severance Agreement, upon 60 days notice, without the officer's consent so long as such amendment or termination is made to all Pioneer Severance Agreements covering all such similarly situated officers of Pioneer. The definition of "Change in Control" under a Pioneer Severance Agreement includes a phrase relating to the sale of "all or substantially all" of the assets of Pioneer. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a stockholder of Pioneer to determine when a Change in Control has occurred may be uncertain. Pioneer Indemnification. Pursuant to the merger agreement relating to the Parker/Mesa Merger, Pioneer agreed to indemnify, defend and hold harmless each person who was at the time of the Parker/Mesa Merger or was at any time prior to August 7, 1997, an officer or director of Mesa or Parker & Parsley or any of their respective subsidiaries or an employee of Mesa or Parker & Parsley or any of their respective subsidiaries 86 96 or who acted as a fiduciary under any employee benefit plans of Mesa or Parker & Parsley or pension plans of Mesa or Parker & Parsley (the "Pioneer Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorneys' fees), liabilities or judgments or amounts that are paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of or in connection with any threatened or actual claim, action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the fact that such person was a director, officer, or such employee of Mesa or Parker & Parsley or any of their respective subsidiaries whether pertaining to any matter existing or occurring at the time of the Parker/Mesa Merger and whether asserted or claimed prior to, or at or after, the time of the Parker/Mesa Merger ("Pioneer Indemnified Liabilities"), including all Pioneer Indemnified Liabilities based in whole or in part on, or arising out of, or pertaining to the merger agreement in connection with the Parker/Mesa Merger or the transactions contemplated hereby, in each case to the fullest extent permitted under applicable law (and Pioneer will pay expenses in advance of the final disposition of any such action or proceeding to each Pioneer Indemnified Party to the fullest extent permitted by law). Without limiting the foregoing, in the event any such claim, action, suit, proceeding or investigation is brought against any Pioneer Indemnified Parties (whether arising before or after the time of the Parker/Mesa Merger), (i) the Pioneer Indemnified Parties may retain counsel reasonably satisfactory to them and Pioneer shall pay all fees and expenses of such counsel for the Pioneer Indemnified Parties; and (ii) Pioneer will use all commercially reasonable efforts to assist in the vigorous defense of any such matter, provided that no party shall be liable for any settlement effected without its written consent, which consent shall not be unreasonably withheld. All rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of the Pioneer Indemnified Parties in the charter and bylaws of Mesa and Parker & Parsley with respect to matters occurring through the time of the Parker/Mesa Merger survived the Parker/Mesa Merger and shall continue in full force and effect for a period of six years from the time of the Parker/Mesa Merger; provided, however, that all rights to indemnification in respect of any Pioneer Indemnified Liabilities asserted or made within such period shall continue until the disposition of such Pioneer Indemnified Liabilities. Pioneer is obligated to maintain certain directors' and officers' liability insurance for the people who were directors and officers of Mesa and Parker & Parsley immediately prior to the time of the Parker/Mesa Merger for six years after such time. For information regarding the current indemnification of Pioneer officers and directors, see "-- Management of Pioneer -- Indemnification." Chairman's Employment Agreement. Jon Brumley, Pioneer's Chairman, is a party to an Employment Agreement, dated as of August 22, 1996 (the "Employment Agreement"), with Pioneer's predecessor. The Employment Agreement provides that if Mr. Brumley's employment is terminated prior to the expiration of the two-year term other than for "cause") (as defined in the Employment Agreement) or if Mr. Brumley terminates his employment for "good reason," then Mr. Brumley shall be entitled, in addition to the payment of his salary, to a severance payment of $1.6 million if the termination occurs within one year of the date of the agreement, $1.2 million if the termination occurs more than one year but less than 18 months after the date of the agreement or $800,000 if the termination occurs after 18 months after the date of the agreement. "Good reason" is defined in the Employment Agreement as (i) a reduction or diminution of his position, titles, offices, duties, responsibilities or status with Pioneer without cause and without his express written consent, (ii) a reduction by Pioneer in his base salary in effect at the time, (iii) relocation of Pioneer's executive offices to a site outside Dallas County or Tarrant County, Texas, or (iv) any other breach by Pioneer of its obligations under the Employment Agreement, which Pioneer fails to cure within a reasonable period of time. The consummation of the Parker/Mesa Merger established "good reason" because Mr. Brumley no longer served as chief executive officer. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Fischer, Mr. Ramsey (Chairman), Mr. Smith, (Arthur L.) and Mr. Wortley served as members of the Compensation Committee of the Pioneer Board during 1996. None of them was an officer or employee, or 87 97 former officer or employee, of Pioneer during 1996. Mr. Fischer was employed by Pioneer on February 1, 1997, and resigned from the Compensation Committee that day. Mr. Smith is the Chairman and Chief Executive Officer of John S. Herold, Inc., which has provided financial services to Pioneer periodically since 1990. During 1996, Pioneer paid John S. Herold, Inc. and a joint venture approximately $60,405 as consideration for its services. Mr. Sheffield, Pioneer's Chairman, President and Chief Executive Officer, owns less than 1% of the outstanding common stock of John S. Herold, Inc. Mr. Wortley is a partner of Vinson & Elkins L.L.P., which provided various legal services to Pioneer during 1996 as Pioneer's primary outside corporate counsel. The dollar amount of fees that Pioneer paid to Vinson & Elkins L.L.P. during the last fiscal year of that law firm did not exceed 5% of that firm's gross revenues for that year. DESCRIPTION OF PIONEER LONG-TERM INCENTIVE PLAN The description set forth below represents a summary of the principal terms and conditions of the Pioneer Natural Resources Company Long-Term Incentive Plan (the "Pioneer Long-Term Incentive Plan") and does not purport to be complete. General Pioneer may grant awards with respect to shares of Pioneer Common Stock under the Pioneer Long-Term Incentive Plan to officers, directors, employees and certain consultants and advisors. The awards under the Pioneer Long-Term Incentive Plan include (i) incentive stock options qualified as such under U.S. federal income tax laws, (ii) stock options that do not qualify as incentive stock options, (iii) stock appreciation rights ("SARs"), (iv) restricted stock awards, and (v) performance units. The number of shares of Pioneer Common Stock that may be subject to outstanding awards under the Pioneer Long-Term Incentive Plan at any one time is equal to 10% of the total number of outstanding shares of Pioneer Common Stock (treating as outstanding all shares of Pioneer Common Stock issuable within 60 days upon conversion or exchange of outstanding, publicly traded convertible or exchangeable securities of Pioneer) minus the total number of shares of Pioneer Common Stock subject to outstanding awards under any other stock-based plan for employees or directors of Pioneer. Currently there are 5,474,349 shares of Pioneer Common Stock available for awards under the Pioneer Long-Term Incentive Plan. The number of shares authorized for award under the Pioneer Long-Term Incentive Plan and the number of shares subject to an award under the Pioneer Long-Term Incentive Plan will be adjusted for stock splits, stock dividends, recapitalizations, mergers, and other changes affecting the capital stock of Pioneer. The Pioneer Board or any committee designated by it may administer the Pioneer Long-Term Incentive Plan (as used for the Pioneer Long-Term Incentive Plan, the "Committee"). Pioneer's Compensation Committee administers the plan. The Committee has broad discretion to administer the Pioneer Long-Term Incentive Plan, interpret its provisions, and adopt policies for implementing the Pioneer Long-Term Incentive Plan. This discretion includes the ability to select the recipient of an award, determine the type and amount of each award, establish the terms of each award, accelerate vesting or exercisability of an award, extend the exercise period for an award, determine whether performance conditions have been satisfied, waive conditions and provisions of an award, permit the transfer of an award to family trusts and other persons, and otherwise modify or amend any award under the Pioneer Long-Term Incentive Plan. Nevertheless, no awards for more than 250,000 shares or more than $2.5 million in cash may be granted to any one employee in a calendar year. Awards The Committee determines the exercise price of each option granted under the Pioneer Long-Term Incentive Plan. The exercise price for an incentive stock option must not be less than the fair market value of the Pioneer Common Stock on the date of grant, and the exercise price of non-qualified stock options must not be less than 85% of the fair market value of the Pioneer Common Stock on the date of grant. Stock options 88 98 may be exercised as the Committee determines, but not later than ten years from the date of grant in the case of incentive stock options. At the discretion of the Committee, holders may use shares of stock to pay the exercise price, including shares issuable upon exercise of the option. An SAR may be awarded in connection with or separate from a stock option. An SAR is the right to receive an amount in cash or stock equal to the excess of the fair market value of a share of the Pioneer Common Stock on the date of exercise over the exercise price specified in the agreement governing the SAR (for SARs not granted in connection with a stock option) or the exercise price of the related stock option (for SARs granted in connection with a stock option). An SAR granted in connection with a stock option will require the holder, upon exercise, to surrender the related stock option or portion thereof relating to the number of shares for which the SAR is exercised. The surrendered stock option or portion will then cease to be exercisable. Such an SAR is exercisable or transferable only to the extent that the related stock option is exercisable or transferable. An SAR granted independently of a stock option will be exercisable as the Committee determines. The Committee may limit the amount payable upon exercise of any SAR. SARs may be paid in cash or stock, as the Committee provides in the agreement governing the SAR. A restricted stock award is a grant of shares of Pioneer Common Stock that are nontransferable or subject to risk of forfeiture until specific conditions are met. The restrictions will lapse in accordance with a schedule or other conditions as the Committee determines, but in no event shall the forfeiture period be less than three years. During the restriction period, the holder of a restricted stock award may, in the committee's discretion, have certain rights as a stockholder, including the right to vote the stock subject to the award or receive dividends on that stock. Restricted stock may also be issued upon exercise or settlement of options, SARs, or performance units. Performance units are performance-based awards payable in cash, stock, or a combination of both. The Committee may select any performance measure or combination of measures as conditions for cash payments or stock issuances under the Pioneer Long-Term Incentive Plan, except that performance measures for executive officers must be objective measures chosen from among the following choices: (a) total stockholder return (Pioneer Common Stock appreciation plus dividends); (b) net income; (c) earnings per share; (d) cash flow per share; (e) return on equity; (f) return on assets; (g) revenues; (h) costs; (i) costs as a percentage of revenues; (j) increase in the market price of Pioneer Common Stock or other securities; (k) the performance of Pioneer in any of the items mentioned in clause (a) through (j) in comparison to the average performance of the companies included in the Standard and Poors' Corporation 500 Composite Stock Price Index; or (l) the performance of Pioneer in any of the items mentioned in clause (a) through (j) in comparison to the average performance of the companies used in a self-constructed peer group established before the beginning of the performance period. The Committee may choose different performance measures if the stockholders so approve, if tax laws or regulations change so as not to require stockholder approval of different measures in order to deduct the compensation related to the award for federal income tax purposes, or if the Committee determines that it is in Pioneer's best interest to grant awards not satisfying the requirements of Section 162(m) of the Internal Revenue Code or any successor law. Under the Pioneer Long-Term Incentive Plan, each non-employee director will automatically receive 50% (and may elect to receive 100%) of the amount of the director's annual retainer fee in the form of Pioneer Common Stock on the last business day of the month in which the annual meeting of the stockholders is held. Pioneer's initial directors received this award on the last day of August 1997. The number of shares included in each award is determined by dividing the applicable percentage of the annual retainer fee by the closing sales price of Pioneer Common Stock on the business day immediately preceding the date of the award. When issued, the shares of Pioneer Common Stock awarded will be subject to transfer restrictions that lapse on the earlier of the next annual meeting of stockholders or the first anniversary date of the award if the person has continued as a director through that date. If a non-employee director's services as a director are terminated for any reason before the earlier of the next annual meeting of stockholders or the first anniversary of the date of grant, transfer restrictions on some of the shares will lapse (and the rest of the shares will be forfeited) based on the number of regularly scheduled meetings of the Pioneer Board that have been held since the last annual meeting and the number of regularly scheduled meetings remaining to be held before the next annual meeting of Pioneer's stockholders. The vesting of ownership and the lapse of transfer restrictions may be accelerated in 89 99 the event of the death, disability, or retirement of the director or a change in control of Pioneer. The Pioneer Long-Term Incentive Plan requires each non-employee director to make an election under the Internal Revenue Code to include the value of the stock in his income in the year of grant and provides for a cash award to the non-employee director in an amount sufficient to pay the federal income taxes due with respect to the award and the cash payment. Other Provisions At the Committee's discretion and subject to conditions that the Committee may impose, a participant's tax withholding with respect to an award may be satisfied by the withholding of shares of Pioneer Common Stock issuable pursuant to the award or delivery of previously owned shares of Pioneer Common Stock, in either case based on the fair market value of the shares. The Committee has discretion to determine whether an award under the Pioneer Long-Term Incentive Plan will have change-of-control features. The Committee also has discretion to vary the change of control features as it deems appropriate. The following describes the change of control features that Pioneer generally expects may apply to awards, if any such feature applies. An award agreement under the Pioneer Long-Term Incentive Plan may provide that, upon a change of control of Pioneer, (1) the holder of a stock option will be granted a corresponding cash SAR, (2) all outstanding SARs and options will become immediately and fully vested and exercisable in full, (3) the restriction period on any restricted stock award will be accelerated and the restrictions will expire, and (4) the target payout opportunity attainable under the performance units will be deemed to have been fully earned for all performance periods upon the occurrence of the change of control and the holder will be paid a pro rata portion of all associated targeted payout opportunities (based on the number of complete and partial calendar months elapsed as of the change of control) in cash within 30 days following the change of control or in stock effective as of the change of control, for cash and stock-based performance units, respectively. The award may also provide that it will remain exercisable for its original term whether or not employment is terminated at or following a change of control. In general, a change of control of Pioneer occurs in any of four situations: (1) a person other than Pioneer or certain affiliated companies or benefit plans becomes the beneficial owner of 20% or more of the voting power of Pioneer's outstanding voting securities (except acquisitions from Pioneer or in a transaction meeting the requirements of the parenthetical exception in clause (3) below); (2) a majority of the Pioneer Board is not comprised of the members of the Board of Directors immediately following the Parker/Mesa Merger and persons whose elections as directors were approved by those directors or their approved successors; (3) Pioneer merges or consolidates with another corporation or entity (whether Pioneer or the other entity is the survivor), or Pioneer and the holders of the voting securities of such other corporation or entity (or the stockholders of Pioneer and such other corporation or entity) participate in a securities exchange (other than a merger, consolidation or securities exchange in which Pioneer's voting securities are converted into or continue to represent securities having the majority or voting power in the surviving company, in which no person other than the surviving company owns 20% or more of the outstanding shares of common stock or voting shares of the surviving corporation (except for persons with such ownership resulting solely from their ownership in Pioneer before the transaction), and in which at least a majority of the board of directors of the surviving corporation were members of the incumbent board of Pioneer); or (4) Pioneer liquidates or sells all or substantially all of its assets, except sales to an entity having substantially the same ownership as Pioneer. If a restructuring of Pioneer occurs that does not constitute a change in control of Pioneer, the Committee may (but need not) cause Pioneer to take any one or more of the following actions: (1) accelerate in whole or in part the time of vesting and exercisability of any outstanding stock options and stock appreciation rights in order to permit those stock options and SARs to be exercisable before, upon, or after the completion of the restructure; (2) grant each optionholder corresponding cash or stock SARs; (3) accelerate in whole or in part the expiration of some or all of the restrictions on any restricted stock award; (4) treat the outstanding performance units as having fully or partially met their targets and pay, in full or in part, the targeted payout; (5) if the restructuring involves a transaction in which Pioneer is not the surviving entity, cause the surviving entity to assume in whole or in part any one or more of the outstanding awards under the Pioneer Long-Term Incentive Plan upon such terms and provisions as the Committee deems desirable; or 90 100 (6) redeem in whole or in part any one or more of the outstanding awards (whether or not then exercisable) in consideration of a cash payment, adjusted for withholding obligations. A restructure generally is any merger of Pioneer or the direct or indirect transfer of all or substantially all of Pioneer's assets (whether by sale, merger, consolidation, liquidation, or otherwise) in one transaction or a series of transactions. Without stockholder approval, the Pioneer Board may not amend the Pioneer Long-Term Incentive Plan to increase materially the aggregate number of shares of Pioneer Common Stock that may be issued under the Pioneer Long-Term Incentive Plan (except for adjustments pursuant to the terms of the Pioneer Long-Term Incentive Plan), reprice options or issue restricted stock with forfeiture provisions which lapse in less than three years. Otherwise, the Pioneer Board may at any time and from time to time alter, amend, suspend or terminate the Pioneer Long-Term Incentive Plan in whole or in part and in any way, subject to requirements that may exist in stock exchange rules or in securities, tax and other laws from time to time. No award may be issued under the Pioneer Long-Term Incentive Plan after the tenth anniversary of stockholder approval of the plan. DESCRIPTION OF PIONEER EMPLOYEE STOCK PURCHASE PLAN The description set forth below represents a summary of the principal terms and conditions of the Pioneer Natural Resources Company Employee Stock Purchase Plan (the "Pioneer Employee Stock Purchase Plan") and does not purport to be complete. General A total of 750,000 shares of Pioneer Common Stock are reserved for issuance under the Pioneer Employee Stock Purchase Plan. The purpose of the Pioneer Employee Stock Purchase Plan is to provide employees of Pioneer who participate in the Pioneer Employee Stock Purchase Plan with an opportunity to purchase Pioneer Common Stock through payroll deductions. The Pioneer Employee Stock Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Code. The Pioneer Employee Stock Purchase Plan is administered by a Committee (as used for the Pioneer Employee Stock Purchase Plan, the "Committee") appointed by the Pioneer Board. Pioneer's Compensation Committee administers the Pioneer Employee Stock Purchase Plan. All questions of interpretation of the Pioneer Employee Stock Purchase Plan will be determined by the Committee, whose decisions will be final and binding upon all participants. Any persons (including officers of Pioneer) who have been employed by Pioneer (or any of its parent or subsidiary corporations within the meaning of Sections 424(e) and (f) of the Code) for at least six months and are employed for at least 20 hours per week and more than five months in a calendar year will be eligible to participate in the Pioneer Employee Stock Purchase Plan subject to certain limitations imposed by Section 423(b) of the Code. Eligible employees may become participants in the Pioneer Employee Stock Purchase Plan by delivering to Pioneer an agreement authorizing payroll deductions prior to the applicable offering date. Offering Dates The Pioneer Employee Stock Purchase Plan will be implemented by one nine-month offering during each calendar year. The offering periods will commence on January 1 and end on September 30 of each year. The first offering period will commence January 1, 1998. Purchase Price The purchase price per share at which shares of Pioneer Common Stock will be sold under the Pioneer Employee Stock Purchase Plan will be the lower of 85% of the fair market value of the Pioneer Common Stock on the first day of each nine-month period and 85% of the fair market value of the Pioneer Common 91 101 Stock on the last day of each offering period. The fair market value of the Pioneer Common Stock on a given date will be the closing sales price of the Pioneer Common Stock on the NYSE on such date. The purchase price of the shares of Pioneer Common Stock to be purchased under the Pioneer Employee Stock Purchase Plan will be accumulated by payroll deductions during each offering period. The deductions may not exceed 15% of a participant's eligible compensation, which is defined in the Pioneer Employee Stock Purchase Plan to include all wages, salary, commissions and bonuses received (including employee contributions to a 401(k) plan) during the offering period. An employee may discontinue participation in the Pioneer Employee Stock Purchase Plan, but may not otherwise increase or decrease the rate of payroll deductions at any time during the offering period. Payroll deductions will commence on the first payday on or following the first day of the offering period and continue at the same rate until terminated as provided in the Pioneer Employee Stock Purchase Plan. Purchase of Stock; Exercise of Option The maximum number of shares placed under option to a participant in an offering period under the Pioneer Employee Stock Purchase Plan will be the lesser of 1,000 or that number determined by dividing the amount of the participant's total payroll deductions during the offering period (and any carryover amounts from the preceding offering period) by the purchase price per share under the Pioneer Employee Stock Purchase Plan. Unless a participant withdraws from the Pioneer Employee Stock Purchase Plan, the participant's option for the purchase of shares will be exercised automatically at the end of each offering period for the maximum number of whole shares at the applicable price. As soon as practicable following the end of each offering period, Pioneer will cause a certificate to be issued in each participant's name representing the total number of whole shares of Pioneer Common Stock acquired by the participant through the exercise of the option. Any balance remaining in a participant's account following the exercise of the participant's option in an offering period will be carried over to the next offering period. Notwithstanding the foregoing, no employee of Pioneer will be permitted to subscribe for shares of Pioneer Common Stock under the Pioneer Employee Stock Purchase Plan if, immediately after the grant of the option, the employee would own 5% or more of the voting power or value of all classes of stock of Pioneer or its subsidiaries (including stock which may be purchased under the Pioneer Employee Stock Purchase Plan or pursuant to any other options), nor will any employee be granted an option which would permit the employee to buy pursuant to the Pioneer Employee Stock Purchase Plan more than $25,000 worth of stock (determined at the fair market value of the shares at the time the option is granted) in any calendar year. Other Provisions A participant may withdraw from the Pioneer Employee Stock Purchase Plan in whole, but not in part, by signing and delivering to Pioneer a notice of withdrawal from the Pioneer Employee Stock Purchase Plan. A participant may elect to withdraw from the Pioneer Employee Stock Purchase Plan at any time prior to 30 days before the last day of the offering period. Upon a withdrawal, Pioneer shall refund to the participant the accumulated payroll deductions credited to the participant's account, and the participant's payroll deductions and interest in the offering shall terminate. If any change is made in Pioneer's capitalization, such as a stock split, stock combination, stock dividend, exchange of shares, or other recapitalization, merger, or otherwise which results in an increase or decrease in the number of outstanding shares of Pioneer Common Stock without receipt of consideration by Pioneer, appropriate adjustments will be made by the Committee in the shares subject to purchase under the Pioneer Employee Stock Purchase Plan and in the purchase price per share. An option granted to a participant under the Pioneer Employee Stock Purchase Plan may not be pledged, assigned or transferred other than by will or the laws of descent and distribution, and any participant's attempt to do so may be treated by Pioneer as an election to withdraw from the Pioneer Employee Stock Purchase Plan. 92 102 The Board of Directors may at any time amend or terminate the Pioneer Employee Stock Purchase Plan, except that such termination shall not affect options previously granted nor may any amendment make any change in an option granted prior thereto which adversely affects the rights of any participant without the written consent of such participant. In additional, no amendment may be made to the Pioneer Employee Stock Purchase Plan without prior approval of the stockholders of Pioneer if such amendment would materially increase the benefits accruing to participants under the Pioneer Employee Stock Purchase Plan, increase the number of shares of Pioneer Common Stock that may be issued under the Pioneer Employee Stock Purchase Plan (other than as a result of anti-dilution provisions), change the class of individuals eligible for participation in the Pioneer Employee Stock Purchase Plan, extend the term of the Pioneer Employee Stock Purchase Plan, or cause options issued under the Pioneer Employee Stock Purchase Plan to fail to meet the requirements for employee stock purchase plans as defined in Section 423 of the Code. RELATED PARTY TRANSACTIONS Incentive Payment for Chairman. Brumley Partners, a Texas general partnership consisting of Jon Brumley, Pioneer's Chairman, and a family member, was admitted as a limited partner with a profits interest in DNR-Mesa Holdings, L.P. ("DNR") pursuant to the Amended and Restated Agreement of Limited Partnership of DNR-Mesa Holdings, L.P. dated November 8, 1996 (the "DNR Agreement"). DNR is a major holder of shares of Pioneer Common Stock. See "Security Ownership of Certain Beneficial Owners and Management." The profits interest held by Brumley Partnership entitles it to receive approximately 3.76% of the profits of DNR after the occurrence of "payout" (which is the receipt by the other partners of partnership distributions equal to such partners' original capital contributions plus an 8% rate of return). The Parker/Mesa Merger resulted in the interest issued to Brumley Partners increasing approximately 5.65% (the post-payout equivalent of a $7.5 million capital contribution to DNR). DNR Consulting Fee. Pursuant to the terms of the stock purchase agreement through which DNR bought the shares of Mesa Series B Preferred Stock, Mesa agreed to pay DNR $400,000 per year (and up to $50,000 per year to cover expenses) in consideration of the provision of investment analysis to Mesa by DNR and its representatives. Upon consummation of the Parker/Mesa Merger, Pioneer assumed Mesa's obligation with respect to payment of such fee. Boone Pickens, a director of Pioneer and the former Chairman of the Board of Directors and Chief Executive Officer of Mesa, effective January 1, 1997, entered into a one year arrangement with Mesa which was assumed by Pioneer whereby Mr. Pickens provides commodity market consulting in return for a $400,000 fee which has already been paid, and will not continue beyond 1997. Additionally, in 1994 Mr. Pickens was awarded a $950,000 bonus payment that has been deferred until Mr. Pickens discontinues his service as a Pioneer director. Effective March 1, 1997, Mesa conveyed certain assets and liabilities relating to its compressed natural gas fueling business to Pickens Fuel Corp., a California corporation controlled by Mr. Pickens, for a sales price of $1,404,000. The conveyed assets primarily consisted of four (4) compressed natural gas fueling stations in Arizona and California. See "-- Compensation Committee Interlocks and Insider Participation" for a discussion of fees paid to certain members of the Pioneer Board for services rendered to Pioneer. 93 103 CAPITALIZATION TABLE The following table sets forth the capitalization of Pioneer as of June 30, 1997 (i) on a historical basis, (ii) pro forma to reflect the Parker/Mesa Merger and the conversion of Pioneer's 6 1/4% Cumulative Monthly Income Convertible Preferred Shares ("Preferred Shares") to Pioneer Common Stock, and (iii) pro forma combined to also reflect the Transaction. This table should be read in conjunction with (i) the Consolidated Financial Statements (and the related notes) of both Pioneer and Mesa included elsewhere herein and (ii) the Consolidated Financial Statements (and the related notes) of Chauvco.
JUNE 30, 1997 -------------------------------------------------- PRO FORMA AUTHORIZED HISTORICAL PRO FORMA COMBINED ---------- ---------- ---------- ---------- (IN THOUSANDS) Line of credit................................. 1,400,000 $ 40,000 $ 650,000 $ 818,691 8 7/8% senior notes due 2005................... 150,000 150,000 150,000 150,000 8 1/4% senior notes due 2007 (net of discount).................................... 150,000 149,311 149,311 149,311 10 5/8% senior subordinated notes due 2006..... 325,000 -- 370,143(a) 370,143 11 5/8% senior subordinated discounted notes due 2006..................................... 264,000 -- 206,395(a) 206,395 Fixed rate building loan....................... 13,000 9,598 9,598 9,598 5.87% senior unsecured notes due 2001.......... 60,000 -- -- 58,348 Other.......................................... 6,612 11,917 17,780 ---------- ---------- ---------- Total long-term debt, including current maturities................................... 355,521 1,547,364 1,780,266 ---------- ---------- ---------- Preferred stock of subsidiary.................. 3,776 188,820 -- -- ---------- ---------- ---------- Stockholders' equity: Common stock................................. 370 736 961 Additional paid-in capital................... 465,234 1,592,895 2,542,481 Treasury stock............................... (34,460) -- -- Unearned compensation........................ (712) (712) (712) Retained earnings............................ 124,479 124,479 124,479 ---------- ---------- ---------- Total stockholders' equity..................... 554,911 1,717,398 2,667,209 ---------- ---------- ---------- Total capitalization................. $1,099,252 $3,264,762 $4,447,475 ========== ========== ========== Common shares.................................. 500,000 35,054 74,409 96,933 Preferred shares............................... 100,000 -- -- --
- --------------- (a) Represents the fair market value of the debt issuance as of August 7, 1997 (date of acquisition from Mesa). 94 104 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PIONEER The following table sets forth selected consolidated financial information of Pioneer for the six months ended June 30, 1997 and 1996 and for each of the five fiscal years in the period ended December 31, 1996. The unaudited consolidated financial data as of and for the periods ended June 30, 1997 and 1996 have been prepared on a basis consistent with the audited Consolidated Financial Statements and, in the opinion of management, include all adjustments, consisting of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Pioneer and the Consolidated Financial Statements of Pioneer and the related notes thereto included elsewhere herein.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- ------------------------------------------------- 1997 1996 1996 1995 1994(A) 1993(B) 1992 -------- -------- -------- -------- -------- ------- ------ (UNAUDITED) (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Statements of Operations Data: Revenues: Oil and gas.......................... $ 198.6 $ 192.0 $ 396.9 $ 375.7 $ 337.6 $ 207.2 $135.1 Natural gas processing............... 11.8 11.1 23.8 33.2 39.2 77.5 54.6 Gas marketing........................ -- -- -- 76.8 103.0 43.8 12.1 Interest and other................... 2.8 2.4 17.5 11.4 6.9 4.4 4.2 Gain on disposition of assets, net(c)............................. 2.7 95.3 97.1 16.6 9.5 23.2 4.2 -------- -------- -------- -------- -------- ------- ------ 215.9 300.8 535.3 513.7 496.2 356.1 210.2 -------- -------- -------- -------- -------- ------- ------ Costs and expenses: Oil and gas production............... 55.4 57.4 110.3 130.9 127.1 78.3 51.8 Natural gas processing............... 6.1 6.0 12.5 25.9 33.6 51.6 38.6 Gas marketing........................ -- -- -- 75.7 101.5 42.8 11.0 Depletion, depreciation and amortization....................... 59.5 59.6 112.1 159.1 145.4 80.4 45.6 Impairment of oil and gas properties and natural gas processing facilities......................... -- -- -- 130.5 -- -- -- Exploration and abandonments......... 18.4 10.8 23.0 27.5 25.2 3.6 4.5 General and administrative........... 15.0 13.0 28.4 37.4 29.0 23.8 11.6 Interest............................. 20.2 26.1 46.2 65.4 50.6 23.3 14.7 Other................................ .8 1.3 2.5 11.3 4.3 3.9 2.3 -------- -------- -------- -------- -------- ------- ------ 175.4 174.2 335.0 663.7 516.7 307.7 180.1 -------- -------- -------- -------- -------- ------- ------ Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change.......... 40.5 126.6 200.3 (150.0) (20.5) 48.4 30.1 Income tax benefit (provision)......... (14.5) (31.7) (60.1) 45.9 6.5 (17.0) (3.0) -------- -------- -------- -------- -------- ------- ------ Income (loss) before extraordinary item and cumulative effect of accounting change............................... 26.0 94.9 140.2 (104.1) (14.0) 31.4 27.1 Extraordinary item..................... -- -- -- 4.3 (.6) -- -- Cumulative effect of accounting change............................... -- -- -- -- -- 17.1 -- -------- -------- -------- -------- -------- ------- ------ Net income (loss)........................ $ 26.0 $ 94.9 $ 140.2 $ (99.8) $ (14.6) $ 48.5 $ 27.1 ======== ======== ======== ======== ======== ======= ====== Income (loss) before extraordinary item and cumulative effect of accounting change per share: Primary.............................. $ .74 $ 2.66 $ 3.92 $ (2.95) $ (.47) $ 1.13 $ 1.05 ======== ======== ======== ======== ======== ======= ====== Fully diluted........................ $ .71 $ 2.32 $ 3.47 $ (2.95) $ (.47) $ 1.13 $ 1.05 ======== ======== ======== ======== ======== ======= ======
95 105
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------- ------------------------------------------------- 1997 1996 1996 1995 1994(A) 1993(B) 1992 -------- -------- -------- -------- -------- ------- ------ Net income (loss) per share: Primary.............................. $ .74 $ 2.66 $ 3.92 $ (2.83) $ (.49) $ 1.74 $ 1.05 ======== ======== ======== ======== ======== ======= ====== Fully diluted........................ $ .71 $ 2.32 $ 3.47 $ (2.83) $ (.49) $ 1.74 $ 1.05 ======== ======== ======== ======== ======== ======= ====== Dividends per share.................... $ .05 $ .05 $ .10 $ .10 $ .10 $ .10 $ .10 ======== ======== ======== ======== ======== ======= ====== Weighted average shares outstanding.... 35.4 35.7 35.7 35.3 30.1 27.9 25.8 Other Financial Data: EBITDAEX(d)............................ $ 138.6 $ 223.0 $ 381.7 $ 232.5 $ 200.7 $ 155.7 $ 95.0 Cash flows from operating activities... 124.6 120.6 230.1 157.3 129.8 112.2 77.2 Cash flows from investing activities... (158.0) 147.7 13.7 (53.3) (446.0) (398.2) (111.8) Cash flows from financing activities... 24.5 (228.4) (245.4) (107.9) 331.4 278.9 33.8 Capital expenditures................... 170.3 76.9 227.8 228.4 554.9 583.5 129.7 Ratio of earnings to fixed charges(e)........................... 3.0 5.8 5.3 (e) (e) 3.0 2.9 Balance Sheet Data (end of period): Working capital........................ $ 10.2 $ 57.1 $ 26.1 $ 31.5 $ 43.7 $ 39.5 $ 8.0 Property, plant and equipment, net..... 1,139.4 955.4 1,040.4 1,121.7 1,349.9 802.0 499.1 Total assets........................... 1,283.5 1,138.6 1,199.9 1,319.2 1,604.9 1,016.9 576.7 Long-term obligations.................. 376.8 328.0 329.0 603.2 727.2 544.3 225.9 Preferred stock of subsidiary.......... 188.8 188.8 188.8 188.8 188.8 -- -- Total stockholders' equity............. 554.9 504.4 530.3 411.0 509.6 348.8 295.0
- --------------- (a) Includes amounts relating to the acquisition of Bridge Oil Limited in July 1994 and the acquisition of properties from PG&E Resources Company in August 1994. (b) Includes amounts relating to the acquisition of certain Prudential-Bache Energy limited partnerships in July 1993. Also includes results of operations related to Pioneer's interest in the Carthage gas processing plant that had been deferred in 1992 and 1993 and the gain of $7.3 million recognized on the sale of that interest on June 30, 1993. (c) Includes a gain of $83.3 million in 1996 related to the disposition of certain wholly-owned subsidiaries. (d) EBITDAEX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAEX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, impairment of oil and gas properties and natural gas processing facilities and exploration and abandonment costs to income (loss) before extraordinary item and cumulative effect of accounting change. Interest includes accrued interest expense and amortization of deferred financing costs. EBITDAEX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of Pioneer's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. (e) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income (loss) before income taxes, extraordinary item and cumulative effect of accounting change plus fixed charges net of interest capitalized. Fixed charges consist of interest expense, interest capitalized and the portion of rental expense attributable to interest. Pioneer's 1995 and 1994 earnings were inadequate to cover its fixed charges. The amount of the deficiencies were $150.0 million in 1995 and $20.5 million in 1994. 96 106 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PIONEER Subsequent to June 30, 1997, the stockholders of Pioneer predecessor entities, Parker & Parsley and Mesa, approved the merger agreement in connection with the Parker/Mesa Merger that resulted in the formation of Pioneer. In accordance with the provisions of Accounting Principles Board No. 16, "Business Combinations," the Parker/Mesa Merger was treated as an acquisition of Mesa by Parker & Parsley. The aggregate purchase consideration related to the assets and liabilities of Mesa, including estimated nonrecurring merger transaction costs, is $999.5 million. As a result, the historical financial statements of Pioneer are those of Parker & Parsley and will present the addition of Mesa's assets and liabilities as an acquisition by Pioneer in August 1997 and all references to Pioneer contained herein refers to Parker & Parsley for dates prior to the Parker/Mesa Merger. Consequently, the results included herein do not give effect to the addition of Mesa's assets and liabilities and Mesa's results of operations and are not indicative of future results of Pioneer. General Financial Performance for the six months ended June 30, 1997 compared with the six months ended June 30, 1996. Pioneer reported net income of $26.0 million ($.74 per share) for the six months ended June 30, 1997, as compared to net income of $94.9 million ($2.66 per share) for the same period in 1996. The six months ended June 30, 1996 include $74.8 million ($2.10 per share), related to net after-tax gains on asset dispositions, primarily due to the sale of Pioneer's Australasian subsidiaries. Excluding production from Pioneer's Australasian subsidiaries which were sold in 1996 and production from nonstrategic domestic assets which were sold in 1996, average daily oil production increased 13% to 31,787 Bbls per day for the six months ended June 30, 1997 from 28,049 Bbls per day for the same period in 1996, and average daily gas production increased 16% to 215,230 Mcf per day from 184,759 Mcf per day during the same period. As discussed more fully in "Results of Operations -- For the Six Months Ended June 30, 1997 and 1996" below, Pioneer's financial performance during 1997 has been positively affected by increases in oil and gas production, decreases in production costs per BOE due to ongoing cost reduction efforts, and a decrease in interest expense due to a decrease in Pioneer's outstanding long-term indebtedness, offset by increases in exploration and general and administrative expenses. Net cash provided by operating activities was $124.6 million during the six months ended June 30, 1997, consistent with net cash provided by operating activities of $120.6 million for the same period in 1996. Pioneer strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility to fund future opportunities. Pioneer's total book capitalization at June 30, 1997 was $1.1 billion, consisting of total long-term debt of $355.5 million, stockholders' equity of $554.9 million and preferred stock of subsidiary of $188.8 million. Debt as a percentage of total capitalization was 32% at June 30, 1997, up slightly from 31% at December 31, 1996. Financial Performance for the year ended December 31, 1996 compared with the year ended December 31, 1995. Pioneer reported net income of $140.2 million ($3.92 per share) for the year ended December 31, 1996 as compared to a net loss of $99.8 million ($2.83 per share) for the year ended December 31, 1995. Net income for the year ended December 31, 1996 was positively affected by the following items: (i) improved oil and gas prices, (ii) decreases in production costs due to certain cost reduction efforts initiated in 1995 and 1996, (iii) a decrease in oil and gas property depletion expense as a result of significant increases in Pioneer's oil and gas reserves during 1995 and 1996, (iv) a decrease in general and administrative expenses primarily resulting from the implementation of measures during 1995 intended to reduce overall general and administrative expenses, and (v) a decrease in interest expense due to a decrease in Pioneer's outstanding long-term indebtedness. Net income for the year ended December 31, 1996 also includes the following aftertax nonoperating items: (i) aggregate gains of $76.3 million related to the disposition of Pioneer's Australasian assets and certain nonstrategic domestic assets (see "Significant Activities in 1996 -- Disposition of Australasian Assets" and "Asset Dispositions" below), (ii) income of $7.4 million related to the settlement of several litigation matters involving Pioneer's Hooker Natural Gas Processing Plant and related assets (see "Significant Activities in 1996 -- Legal Actions" below), (iii) a loss of $2.8 million associated with the write-off of certain tax attributes related to litigation contingencies that are 97 107 no longer available and (iv) income of $400,000 from the operations of the Australian assets and nonstrategic domestic assets prior to their sale in 1996. Net income for December 31, 1995 includes the following after-tax nonoperating items: (i) noncash charges of $84.8 million associated with the adoption of SFAS 121 (as defined in "For the Years Ended December 31, 1996, 1995 and 1994 -- Depletion Expense" below), (ii) charges of $6.9 million associated with the amortization of deferred compensation awarded in 1993 and organizational changes designed to reduce overall general and administrative expenses, (iii) charges of $4.4 million consisting of previously capitalized financing fees and expenses associated with certain legal matters, and (iv) net gains of $10.8 million associated with the disposition of nonstrategic assets. Net cash provided by operating activities, before changes in operating assets and liabilities, increased 39% to $228.5 million for the year ended December 31, 1996 as compared to $164.2 million for the year ended December 31, 1995. This increase was primarily attributable to improved commodity prices during 1996, declining production costs due to the improvements made in the overall cost structure of Pioneer during 1995 and 1996 and decreased interest expense due to a decrease in long-term debt. Long-term debt has been reduced by $265.6 million to $320.9 million at December 31, 1996 from $586.5 million at December 31, 1995 due principally to the application of substantially all of the proceeds from the disposition of Pioneer's Australasian and certain domestic assets to Pioneer's outstanding indebtedness, as described below. Consequently, Pioneer's long-term debt to total capitalization has been reduced to 31% at December 31, 1996 from 49% at December 31, 1995. Significant Activities for the Six Months Ended June 30, 1997 Drilling and Acquisition Activities. Pioneer's 1997 capital expenditure budget has been increased to $335 million up from the previous budget of $270 million, reflecting planned expenditures of $215 million for exploitation activities, $69 million for exploration activities and $51 million for oil and gas property acquisitions in Pioneer's core areas of Texas, Oklahoma, New Mexico and Louisiana. As of June 30, 1997, expenditures were on target with the new budget totaling $187.3 million for the six-month period. During the first half of 1997, Pioneer participated in the completion of 223 gross exploration and development wells, including 152 wells in the Spraberry Division, 30 wells in the Permian Division, 19 wells in the Gulf Coast Division, 16 wells in the MidContinent Division and six wells in Argentina. Of these wells, 76 were in progress at December 31, 1996. Of the total wells completed during the six months ended June 30, 1997, 202 wells were completed successfully, which resulted in a 91% success rate. In addition to the wells completed in the first half of 1997, Pioneer had 131 wells in progress at June 30, 1997. In total during 1997, Pioneer plans to drill approximately 620 development wells and 60 exploratory wells and to perform recompletions on over 150 wells. In May of 1997, Pioneer acquired a 35% interest in approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from Union Pacific Resources Company ("UPRC") for $26.9 million. Pioneer and UPRC have signed an exploration agreement to jointly explore and develop this area located in eastern Texas and plan to begin drilling the first exploration well before the end of the year. Also, during May of 1997, Pioneer finalized negotiations with Triton Energy for a 40% working interest in a joint exploration program of two blocks in Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1 is expected to be completed by the end of the year at an estimated total cost to Pioneer of $3.7 million. In addition, the Gulf Coast Division completed the acquisition of a majority interest in the Maude Traylor field in Calhoun County, Texas for approximately $8.8 million in February 1997. The acquisition represented an average working interest of 87% in approximately 1,840 acres and five wells which produce from the upper and lower Frio formations. Pioneer is currently realizing gross gas production of 1.7 MMcf per day in this field, and since Pioneer assumed operations the gross oil production rate has tripled to 161 Bbls per day. Pioneer plans to drill up to nine additional wells during 1997 and 1998 on this acreage utilizing existing 3-D seismic information. Also during February 1997, the Texas Railroad Commission (which regulates oil and gas production) entered a favorable order on Pioneer's application to allow administrative approval of uncontested applications 98 108 to increase the density of the drilling in the Spraberry field from one well per 80 acres to one well in 40. Pioneer believes such reduced spacing may provide in excess of 1,000 additional drilling locations which have the potential to add 70 million equivalent barrels to Pioneer's reserve base. Asset Dispositions. For the six months ended June 30, 1997, Pioneer's asset disposition activity primarily consisted of the sale of certain domestic assets for proceeds of $10.7 million and resulted in a net gain of $1.9 million and the sale of Pioneer's subsidiary with an ownership interest in oil and gas properties in Turkey for proceeds of $1.6 million which resulted in the recognition of a gain of $725 thousand. During the first half of 1996, Pioneer sold certain wholly-owned Australasian subsidiaries for proceeds of $178.7 million and a pre-tax gain of $85.2 million and certain nonstrategic domestic assets for proceeds of $45.9 million that resulted in the recognition of a pre-tax net gain of $10 million. Conversion of Subsidiary Preferred Shares to Common Stock. On July 28, 1997, Pioneer exercised its right to require each holder of 6 1/4% Cumulative Monthly Income Convertible Preferred Shares ("Preferred Shares") to mandatorily exchange all Preferred Shares for shares of Pioneer Common Stock. As a result of the exchange, the $188.8 million reflected in the caption "Preferred stock of subsidiary" in Pioneer's Consolidated Balance Sheet as of June 30, 1997 will be reclassified into stockholders' equity with the issuance of approximately 6.7 million shares of Pioneer Common Stock in exchange for the 3,776,400 Preferred Shares outstanding. In addition, Pioneer will no longer incur interest expense associated with the Preferred Shares of approximately $12 million per year. Pro Forma Earnings per Share. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") which simplifies the existing standards for computing earnings per share ("EPS") and makes them comparable to international standards. Pioneer does not anticipate that its EPS as calculated under SFAS 128 will differ significantly from its existing disclosures. Reporting Comprehensive Income. In June 1997, the FASB issued Statement of Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Specifically, SFAS 130 requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Although this statement is effective for fiscal years beginning after December 15, 1997, Pioneer anticipates that it will early adopt the provisions of SFAS 130 in its year ended December 31, 1997 consolidated financial statements. Comprehensive income consists of the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Specifically, this includes net income and other comprehensive income, which is made up of certain changes in assets and liabilities that are not reported in a statement of operations but are included in the balances within a separate component of equity in a statement of financial position. Such changes include, but are not limited to, unrealized gains for marketable securities and future contracts, foreign currency translation adjustments and minimum pension liability adjustments. Segment Reporting. In June 1997, the FASB issued Statement of Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which establishes standards for public business enterprises for reporting information about operating segments in annual financial statements and requires that such enterprises report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Pioneer operates in the one product line of oil and gas production in limited geographic areas. This information and information about major customers historically has been disclosed in Pioneer's annual 99 109 financial statements. Pioneer plans to implement SFAS 131 in its year ended December 31, 1998 financial statements. Significant Activities in 1996 Exploration and Development Activities. Pioneer continues to realize the benefits of its focused activities in the exploration and development of its existing core areas. Since completing two major acquisitions in 1994, Pioneer has devoted its efforts to exploitation and exploration of its existing property base and Pioneer believes that substantial additional opportunities remain. Drilling Activities. As was the case in 1994 and 1995, Pioneer's 1996 development drilling activities focused primarily on Pioneer's Permian Basin oil properties and Gulf Coast gas properties. During 1996, Pioneer participated in the drilling and completion of 599 gross exploration and development wells (482 of which were operated by Pioneer), including 326 in the Spraberry Division, 177 in the Permian Division, 48 in the MidContinent Division, 38 in the Gulf Coast Division and 10 in other areas. Pioneer's total capital expenditures during 1996 were $233 million, approximately $212 million of which was spent on exploration and development activities. During 1996, Pioneer announced several discoveries and developments in domestic locations. In November 1996, Pioneer announced a significant oil discovery in the War-Wink West field in the Delaware Basin of West Texas. This Company operated well, the University 18-34 #1, tested at rates of up to 720 barrels of oil per day and is currently producing at its expected allowable rate of approximately 270 barrels of oil per day and 374 thousand cubic feet of gas per day. Pioneer and Enserch Exploration, Inc. each own a 50% working interest in this well, which is the first in their joint exploration and development of the 4,500 acre War-Wink prospect. During 1997, Pioneer plans to continue its development of this prospect by drilling two confirmation wells and an additional two to four development wells. Pioneer and Enserch also control approximately 30,000 additional acres in the Delaware Basin play in southeastern New Mexico and West Texas where they intend to drill eight exploratory wells in 1997. In addition, on November 25, 1996, Pioneer announced the successful completion of three development wells in the South Texas Lopeno field in which Pioneer owns a 50% working interest. The three wells, operated by Pioneer, are currently producing a total of 20 MMcf of natural gas per day. On December 19, 1996, Pioneer announced the successful completion of the S.E. Turner Gas Unit #2 in its Central Texas Gulf Coast Pawnee field in which Pioneer owns a 100% working interest. The dual lateral horizontal unstimulated producer is currently flowing at a rate of 3.1 MMcf per day. As a result of this successful activity, Pioneer has identified an additional six horizontal prospects in the Pawnee field and plans to begin developmental activity on these prospects in the first quarter of 1997. During 1996, Pioneer participated in several discoveries in the Confluencia Sur field in the Nuequen Basin of Central Argentina in which Pioneer owns a 14.42% interest. In early 1996, Pioneer announced the successful completion of two exploratory wells (the Naco x-1 and the Sierra de Reyes x-1) and, in January 1997, Pioneer announced the successful completion of three development wells, also in the Confluencia Sur field. The three wells, the Sierra de Reyes 2, 3 and 4, operated by Petrolera Argentina San Jorge S.A., collectively tested 3,727 barrels of oil per day. Pioneer expects to drill an additional two to three development wells in the Confluencia Sur field during the first six months of 1997 in order to increase daily oil production to 6,000 barrels (865 barrels net to Pioneer's interest). During 1997, Pioneer will continue with its emphasis on core development, exploration and production activities, with a primary focus on the exploitation of its current portfolio of drilling locations. This portfolio was significantly enhanced and expanded by the major acquisitions completed in 1994 and the 1995 and 1996 drilling programs which have added a large number of new locations to which proved reserves have been assigned. Pioneer believes that its current portfolio of undeveloped prospects provides attractive development and exploration opportunities for at least the next three to five years. Proved Reserves. Pioneer's proved reserves totaled 302.2 million BOE at December 31, 1996, 296.8 million BOE at December 31, 1995 and 282.5 million BOE at December 31, 1994. Pioneer achieved these annual increases in reserves despite having sold reserves of 45.8 million BOE in 1996 and 34.8 million BOE in 1995. Excluding these sold reserves, total proved reserves increased 21% in 1996 and 28% in 1995. Oil reserves at 100 110 year-end 1996 were 163.9 million Bbls compared to 147.3 million Bbls at year-end 1995 and 144.5 million Bbls at year-end 1994 (an 11% increase from 1995 to 1996 and a 2% increase from 1994 to 1995). Natural gas reserves at year-end 1996 were 829.4 Bcf, compared to 896.9 Bcf at year-end 1995 and 827.5 Bcf at year-end 1994 (an 8% decrease from 1995 to 1996 and an 8% increase from 1994 to 1995). Reserve Replacement. For the eighth consecutive year, Pioneer was able to replace its annual production volumes with proved reserves of crude oil and natural gas, stated on an energy equivalent basis. During 1996, Pioneer added 75 million BOE resulting in reserve replacement of 314% of total production. Of the 75 million BOE reserve additions, 71.1 million BOE were added through exploration and development drilling activities, 2.2 million BOE were added through acquisitions of proved properties and 1.7 million BOE were the net result of revisions. Reserves added by development drilling are primarily from the identification of additional infill drilling locations and new secondary recovery projects. Reserve revisions result from several factors including changes in existing estimates of quantities available for production and changes in estimates of quantities which are economical to produce under current pricing conditions. Pioneer's reserves as of December 31, 1996 were estimated using a price of $24.55 per Bbl and $3.97 per Mcf. Should prices decline in future years, reserves may be revised downward for quantities which may be uneconomical to produce at lower prices. Pioneer's 1996 reserve replacement rate on a barrel of oil equivalent basis was 314%, which included reserve replacement rates for oil and natural gas of 398% and 239%, respectively. Previous reserve replacement performance rates were 281% in 1995 (263% for oil and 297% for gas) and 537% in 1994 (549% for oil and 526% for gas). For the three year period ended December 31, 1996, the three year average reserve replacement rate was 377%. Through 1994, Pioneer's reserve replacement rate was primarily the product of its acquisition activities. Beginning in 1995, and to a greater extent in 1996, the reserve replacement rates have been influenced more by exploration and development activities and less by acquisition activities. Pioneer seeks to achieve an annual reserve replacement rate of at least 150% through the emphasis on its exploration and development activities. Finding Cost. Pioneer's acquisition and finding cost for 1996 was $3.10 per BOE as compared to the 1995 and 1994 acquisition and finding costs of $2.87 and $5.11 per BOE, respectively. The average acquisition and finding cost for the three-year period from 1994 to 1996 was $3.99 per BOE representing an 18% decrease from the 1995 three-year average rate of $4.84. Disposition of Australasian Assets. On March 28, 1996, Pioneer completed the sale of certain wholly-owned Australian subsidiaries to Santos Ltd., and on June 20, 1996, Pioneer completed the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea, Inc., to Phillips Petroleum International Investment Company. During the year ended December 31, 1996, Pioneer received aggregate consideration of $237.5 million for these combined sales which consisted of $186.6 million of proceeds for the equity of such entities, $21.8 million for reimbursement of certain intercompany cash advances, and the assumption of such subsidiaries' net liabilities, exclusive of oil and gas properties, of $29.1 million. The proceeds, after payment of certain costs and expenses, were utilized to reduce Pioneer's outstanding bank indebtedness and for general working capital purposes. Pioneer recognized an after-tax gain of $67.3 million from the disposition of these subsidiaries. Cost Reductions. Production costs per BOE declined 5% (from $4.83 to $4.61) for the year ended December 31, 1996 as compared to the year ended December 31, 1995. This decline is despite a 47% or $.29 per BOE increase in production taxes resulting from oil and gas prices that were considerably higher in 1996 as compared to 1995. The significant decline in the remaining components of production costs, primarily lease operating expense, is the result of Pioneer's emphasis on cost control efforts and the disposition of certain high cost domestic nonstrategic oil and gas properties during 1995 and 1996. During 1995, Pioneer initiated programs to study specific opportunities for significant future reductions in its entire cost structure. These programs have continued in 1996, and Pioneer expects production costs per BOE to continue to decline as specific programs for further cost reductions are implemented. Asset Dispositions. From time to time, Pioneer disposes of nonstrategic assets in order to raise capital for other activities, reduce debt or eliminate costs associated with nonstrategic assets. During the year ended 101 111 December 31, 1996, Pioneer sold certain domestic nonstrategic oil and gas properties, gas plants and other related assets for aggregate proceeds of approximately $58.4 million. The proceeds from the asset dispositions were initially used to reduce Pioneer's outstanding bank indebtedness and subsequently to provide funding for a portion of Pioneer's 1996 capital expenditures, including purchases of oil and gas properties in Pioneer's core areas. Commodity Prices. Pioneer benefited from the significantly higher oil and gas prices during 1996. In 1996, Pioneer received an average oil price of $19.96 per Bbl and an average gas price of $2.27 per Mcf representing increases of 18% and 23%, respectively, from 1995. The oil and gas prices that Pioneer reports are based on the market price received for the commodities adjusted by the results of Pioneer's hedging activities. Pioneer periodically enters into commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities Pioneer produces and sells, (ii) support Pioneer's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. During 1996, Pioneer's hedging activities reduced the average price received for oil and gas sales 6% and 5%, respectively, as discussed below. Natural Gas. Pioneer employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The average gas prices per Mcf that Pioneer reports includes the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. Pioneer reported an average gas price of $2.27 per Mcf for the year ended December 31, 1996. Pioneer's average realized price for physical gas sales (excluding hedge results) for the same period was $2.39 per Mcf. The comparable average NYMEX prompt month closing for the year ended December 31, 1996 was $2.50 per Mcf. At December 31, 1996, Pioneer had 28.9 Bcf of future gas production hedged at a weighted average NYMEX price of $2.17 per Mcf. Crude Oil. All material purchase contracts governing Pioneer's oil production are tied directly or indirectly to NYMEX prices. The average oil prices per Bbl that Pioneer reports includes the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. Pioneer reported an average oil price of $19.96 per Bbl for the year ended December 31, 1996. Pioneer's average realized price for physical oil sales (excluding hedge results) for the same period was $21.33 per Bbl. The comparable average NYMEX prompt month closing for the year ended December 31, 1996 was $22.03 per Bbl. At December 31, 1996, Pioneer had 6.2 million barrels of future oil production hedged at a weighted average NYMEX price of $19.39 per Bbl. Capitalization. Pioneer strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility for future opportunities. Pioneer's total book capitalization at December 31, 1996 was $1 billion, consisting of total long-term debt of $326 million, stockholders' equity of $530 million and preferred stock of subsidiary of $189 million. Pioneer attempts to maintain a debt to total capitalization ratio of 40% to 45% in order to achieve its goal of financial flexibility. Debt as a percentage of total capitalization was 31% at December 31, 1996, down from 49% at December 31, 1995. This decrease is primarily the result of the application of the net proceeds from the disposition of Pioneer's Australian assets and the disposition of certain other nonstrategic domestic assets described above to Pioneer's outstanding indebtedness. Legal Actions. On August 1, 1996, Dorchester Hugoton, Ltd. ("DHL"), Damson Master Limited Partnership ("DMLP"), a wholly-owned subsidiary of Pioneer, and their related entities entered into a settlement agreement resolving all outstanding litigation between the parties that had arisen in connection with DMLP's Hooker Plant, the Hooker Gathering System and certain other matters. Pioneer recognized other income of $11.4 million ($7.0 million of which was received in cash) associated with the settlement of these litigation matters. Additionally, Pioneer will receive an annual formula-based production payment with the first annual payment to begin in February 1997 and to continue thereafter annually through February 2026. Pioneer estimates the total value of the production payments to be at least $5.0 million, although such payments are dependent on future gas prices and related transportation costs. The production payments will be recognized as other income over the term of the production payment contract. 102 112 Pioneer believes that the costs for compliance with environmental laws and regulations have not and will not have a material effect on Pioneer's financial position or results of operations. Results of Operations For the Six Months Ended June 30, 1997 and 1996 Oil and Gas Production The following table describes the results of Pioneer's oil and gas production activities for the six months ended June 30, 1997 and 1996.
SIX MONTHS ENDED JUNE 30, --------------------- 1997 1996 --------- --------- (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) Revenues: Oil and gas............................................... $ 198,626 $ 192,014 Gain on disposition of assets, net(a)..................... 76 7,753 --------- --------- 198,702 199,767 --------- --------- Costs and expenses: Oil and gas production.................................... (55,392) (57,404) Depletion................................................. (54,860) (54,773) Exploration and abandonments.............................. (11,249) (4,586) Geological and geophysical................................ (7,166) (4,851) --------- --------- (128,667) (121,614) --------- --------- Operating profit (excluding general and administrative expenses and income taxes) $ 70,035 $ 78,153 ========= =========
- --------------- (a) The 1997 amount does not include the gain related to the disposition of Pioneer's subsidiary which owned an interest in oil and gas properties in Turkey. The 1996 amount does not include the gain related to the disposition of certain of Pioneer's wholly-owned Australasian subsidiaries. Worldwide: Production: Oil (MBbls)............................................ 5,753 5,721(a) Gas (MMcf)............................................. 38,957 38,196(a) Total (MBOE)...................................... 12,246 12,087 Average daily production: Oil (Bbls)............................................. 31,787 31,432(a) Gas (Mcf).............................................. 215,230 209,866(a) Average oil price (per Bbl)............................... $ 19.20 $ 19.30 Average gas price (per Mcf)............................... 2.26 2.14 Costs (per BOE): Lease operating expense................................ 3.26 3.60 Production taxes....................................... .91 .79 Workover costs......................................... .35 .36 -------- -------- Total production costs............................ 4.52 4.75 ======== ======== Depletion.............................................. $ 4.48 $ 4.53 ======== ========
- --------------- (a) Includes 616 MBbls (3,383 Bbls per day) and 4.5 Bcf (25,107 Mcf per day) of production associated with certain nonstrategic assets which were sold during 1996. 103 113 Domestic: Production: Oil (MBbls)............................................ 5,679 5,347(a) Gas (MMcf)............................................. 38,957 36,269(a) Total (MBOE)...................................... 12,172 11,392 Average daily production: Oil (Bbls)............................................. 31,376 29,378(a) Gas (Mcf).............................................. 215,230 199,278(a) Average oil price (per Bbl)............................... $ 19.18 $ 19.29 Average gas price (per Mcf)............................... 2.26 2.15 Costs (per BOE): Lease operating expense................................ 3.24 3.52 Production taxes....................................... .92 .84 Workover costs......................................... .35 .38 -------- -------- Total production costs............................ 4.51 4.74 ======== ======== Depletion.............................................. $ 4.45 $ 4.46
- --------------- (a) Includes 266 MBbls (1,462 Bbls per day) and 2.6 Bcf (14,519 Mcf per day) of production associated with certain nonstrategic assets which were sold during 1996. Oil and Gas Revenues. Revenues from oil and gas operations increased 3% during the six months ended June 30, 1997 to $198.6 million, as compared to $192 million during the same period in 1996. The increase is primarily due to an increase in the average gas price received and increases in oil and gas production, offset by a slight decrease in the average price received per barrel of oil. The increase in oil and gas production during the six months ended June 30, 1997 as compared to the same period in 1996 is a direct result of the successes of Pioneer's exploration and exploitation efforts. Such production growth becomes particularly evident in light of the fact that a portion of the average daily oil and gas production for the first half of 1996 related to properties included in the 1996 sale of Pioneer's Australasian subsidiaries and the 1996 sale of certain nonstrategic domestic assets. Excluding production associated with assets sold during 1996, average daily oil production increased 13% from 28,049 Bbls for the first half of 1996 to 31,787 Bbls for the first half of 1997 and average daily gas production increased 16% from 184,759 Mcf to 215,230 Mcf for the same period. The average oil price received for the six months ended June 30, 1997 decreased slightly (from $19.30 to $19.20 for the six months ended June 30, 1996 and 1997, respectively), while the average gas price received increased 6% (from $2.14 to $2.26 for the six months ended June 30, 1996 and 1997, respectively). Hedging Activities The oil and gas prices that Pioneer reports are based on the market price received for the commodities adjusted by the results of Pioneer's hedging activities. Pioneer periodically enters into commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities Pioneer produces and sells, (ii) support Pioneer's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Crude Oil. All material purchase contracts governing Pioneer's oil production are tied directly or indirectly to NYMEX prices. The average oil price per Bbl that Pioneer reports includes the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. Pioneer's average realized price for physical oil sales (excluding hedge results) for the six months ended June 30, 1997 was $20.24 per Bbl, while, as a point of reference, the comparable average NYMEX prompt month closing per Bbl for the same period was $21.36. Pioneer recorded net reductions to oil revenues of $6 million for the six months ended June 30, 1997, as a result of its commodity hedges. 104 114 During the six months ended June 30, 1996, Pioneer realized an average price for physical oil sales (excluding hedge results) of $19.84 per Bbl, while, as a point of reference, the comparable average NYMEX prompt month closing per Bbl for the same period was $20.60. Pioneer recorded net reductions to oil revenues of $3.1 million for the six months ended June 30, 1996, as a result of its commodity hedges. Natural Gas. Pioneer employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The average gas price per Mcf that Pioneer reports includes the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. Pioneer's average realized price for physical gas sales (excluding hedge results) for the six months ended June 30, 1997 was $2.42 per Mcf, while as a point of reference, the comparable average NYMEX prompt month closing per Mcf for the same period was $2.25. Pioneer recorded a net reduction to gas revenues of $6.1 million for the six months ended June 30, 1997, as a result of its commodity hedges. During the six months ended June 30, 1996, Pioneer realized an average price for physical gas sales (excluding hedge results) of $2.22 per Mcf, while as a point of reference, the comparable average NYMEX prompt month closing per Mcf for the same period was $2.40. Pioneer recorded net reductions to gas revenues of $3.1 million for the six months ended June 30, 1996, as a result of its commodity hedges. Production Costs. While total production costs per BOE decreased 5% to $4.52 during the six months ended June 30, 1997 as compared to production costs per BOE of $4.75 during the same period in 1996, the primary component of production costs, lease operating expense, decreased 9% from $3.60 per BOE in the first half of 1996 to $3.26 per BOE for the same period in 1997. These reductions are primarily due to Pioneer's concentrated efforts to evaluate and reduce all operating costs and the sale of certain high operating cost properties during 1996. The success of these cost reduction efforts is partially offset by a 15% or $0.12 per BOE increase in average production taxes per BOE resulting from higher gas prices during the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. Depletion Expense. Depletion expense per BOE declined slightly to $4.48 during the six months ended June 30, 1997, as compared to $4.53 per BOE during the same period in 1996, primarily due to reserves added by Pioneer's successful drilling program during 1996 and 1997. Exploration and Abandonments/Geological and Geophysical Costs. Exploration and abandonments/geological and geophysical costs increased to $18.4 million during the six months ended June 30, 1997 from $9.4 million during the same period in 1996. The increase is largely the result of increased domestic activity, both in exploratory drilling and geological and geophysical activity, resulting from Pioneer's increased focus on exploration activities. During the six months ended June 30, 1997, the domestic exploratory dry hole costs were primarily related to 12 unsuccessful exploratory wells in the Gulf Coast Division, six unsuccessful exploratory wells in the MidContinent Division and two unsuccessful wells in the Permian Division, at a total cost of $6.8 million, $1.7 million and $500 thousand, respectively, and additional costs of approximately $700 thousand associated with wells which were determined to be unsuccessful in 1996. These increases are offset by a decrease in leasehold abandonment expenses. The following table sets forth the components of Pioneer's 1997 and 1996 first half expense:
SIX MONTHS ENDED JUNE 30, ---------------- 1997 1996 ------- ------ (IN THOUSANDS) Exploratory dry holes: United States............................................. $ 9,701 $ 724 Foreign................................................... 219 580 Geological and geophysical costs: United States............................................. 5,790 3,299 Foreign................................................... 1,376 1,552 Leasehold abandonments and other............................ 1,329 3,282 ------- ------ $18,415 $9,437 ======= ======
105 115 Approximately 21% of Pioneer's 1997 capital budget will be spent on exploratory projects (compared to 16.7% in 1996 and 13.3% in 1995). Pioneer currently anticipates that its 1997 exploration efforts will be concentrated in the Gulf Coast Division, the Permian Division, the MidContinent Division, Pioneer's newly acquired interests in the Cotton Valley Pinnacle Reef Trend and its interests in Guatemala. Pioneer continues to review opportunities involving exploration joint ventures in domestic or international areas outside Pioneer's existing core operating areas. Natural Gas Processing Natural gas processing revenues increased 6% to $11.8 million for the six months ended June 30, 1997 as compared to $11.1 million for the same period in 1996, and natural gas processing costs for the six months ended June 30, 1997 of $6.1 million were consistent with 1996 costs of $6 million. The increases in natural gas processing revenues are primarily due to increases in the prices of NGL's and residue gas. The average price per Bbl of NGL's increased slightly during the first half of 1997 compared to the first half of 1996 (from $13.25 in 1996 to $13.40 in 1997), and the average price per Mcf of residue gas increased 25% during the same period (from $2.01 in 1996 to $2.51 in 1997). During the first half of 1996, Pioneer recognized noncash pre-tax charges of $1.3 million related to abandonments of certain of Pioneer's gas processing facilities and the cancellation of certain gas processing contracts. General and Administrative Expense General and administrative expense was $15 million for the six months ended June 30, 1997, as compared to $13 million for the six months ended June 30, 1996. The increase is primarily due to severance costs of $1.4 million in the second quarter of 1997 associated with certain reorganizations within Pioneer's management structure as a result of the Parker/Mesa Merger. Interest Expense Interest expense for the six months ended June 30, 1997 decreased to $20.2 million as compared to $26.1 million for the same period in 1996. The decrease is primarily due to a decrease in the weighted average outstanding balance of Pioneer's indebtedness of $151.9 million for the six months ended June 30, 1997, as compared to the same period in 1996. The decrease in Pioneer's indebtedness was primarily the result of the application of proceeds from the sale of Pioneer's Australasian subsidiaries and the sales of certain domestic assets during 1996 to the outstanding balance of Pioneer's bank credit facility. The weighted average interest rate on Pioneer's indebtedness during the six months ended June 30, 1997 of 7.83% was comparable to the rate of 7.81% for the same period in 1996. During the six months ended June 30, 1997, Pioneer recorded a reduction in interest expense of $700 thousand related to a series of interest rate swap agreements which effectively convert $150 million of Pioneer's fixed rate borrowings into floating rate obligations. During the same period in 1996, such agreements resulted in a reduction in interest expense of $110 thousand. Income Taxes Pioneer's income tax provisions of $14.5 million for the six months ended June 30, 1997 and $31.7 million for the six months ended June 30, 1996, reflect the net provision resulting from the separate tax calculation prepared for each tax jurisdiction in which Pioneer is subject to income taxes. 106 116 For the Years Ended December 31, 1996, 1995 and 1994 Oil and Gas Production The following table describes the results of Pioneer's oil and gas production activities during 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT AVERAGE PRICE AND COST DATA) Revenues: Oil and gas............................................... $396,931 $375,720 $337,602 Gain on disposition of oil and gas properties, net(a)..... 7,786 16,847 9,175 -------- -------- -------- Costs and expenses:....................................... 404,717 392,567 346,777 -------- -------- -------- Oil and gas production.................................... 110,334 130,905 127,118 Depletion................................................. 102,803 145,468 131,702 Impairment of oil and gas properties...................... -- 129,745 -- Exploration and abandonments.............................. 12,653 16,431 12,345 Geological and geophysical................................ 9,054 11,121 8,402 -------- -------- -------- 234,844 433,670 279,567 -------- -------- -------- Operating profit (loss) (excluding general and administrative expense and income taxes)............... $169,873 $(41,103) $ 67,210 ======== ======== ========
- --------------- (a) The 1996 amount does not include the gain related to the disposition of Pioneer's Australasian assets. Worldwide: Production: Oil (MBbls)............................................ 11,275 12,902 12,147 Gas (MMcf)............................................. 75,851 85,295 79,674 Total (MBOE)........................................... 23,916 27,118 25,426 Average daily production: Oil (Bbls)............................................. 30,805 35,348 33,279 Gas (Mcf).............................................. 207,244 233,685 218,285 Average oil price (per Bbl)............................... $ 19.96 $ 16.96 $ 15.40 Average gas price (per Mcf)............................... 2.27 1.84 1.89 Costs per BOE: Lease operating expenses............................... 3.43 3.99 4.10 Production taxes....................................... .91 .62 .67 Workover costs......................................... .27 .22 .23 -------- -------- -------- Total production costs............................ $ 4.61 $ 4.83 $ 5.00 ======== ======== ======== Depletion.............................................. $ 4.30 $ 5.36 $ 5.18 Domestic: Production: Oil (MBbls)............................................ 10,872 11,328 11,267 Gas (MMcf)............................................. 73,924 76,669 75,040 Total (MBOE)........................................... 23,193 24,106 23,774 Average daily production: Oil (Bbls)............................................. 29,705 31,036 30,868 Gas (Mcf).............................................. 201,979 210,052 205,589 Average oil price (per Bbl)............................... $ 19.96 $ 16.70 $ 15.26 Average gas price (per Mcf)............................... 2.27 1.84 1.89 Costs per BOE: Lease operating expense................................ 3.39 3.97 4.11 Production taxes....................................... .94 .70 .72 Workover costs......................................... .28 .25 .25 -------- -------- -------- Total production costs............................ $ 4.61 $ 4.92 $ 5.08 ======== ======== ======== Depletion.............................................. $ 4.25 $ 5.19 $ 5.07
107 117 Oil and Gas Revenues. Revenues from oil and gas operations totaled $396.9 million in 1996, $375.7 million in 1995 and $337.6 million in 1994, representing a 6% increase from 1995 to 1996 and an 11% increase from 1994 to 1995. The increase from 1995 to 1996 is primarily attributable to the higher average prices being received for both oil and gas production and increases in production due to Pioneer's successful exploitation and exploration activities in 1995 and 1996, offset by the decreased production resulting from the 1996 sale of Pioneer's Australasian assets and the 1995 and 1996 sales of certain domestic assets. The average oil price received for the year ended December 31, 1996 increased 18% (from $16.96 in 1995 to $19.96 in 1996), while the average gas price received increased 23% (from $1.84 in 1995 to $2.27 in 1996). The increase from 1994 to 1995 is primarily due to (i) a full year of production in 1995 from properties purchased in 1994 offset by the production lost from those properties sold in 1995, (ii) an increase in the average oil price received of 10% (from $15.40 per Bbl in 1994 to $16.96 per Bbl in 1995), and (iii) Pioneer's successful development drilling activities during 1994 and 1995, which resulted in increased production in 1995. Excluding production from Pioneer's Australasian assets which were sold in 1996 and production from the nonstrategic domestic assets which were sold in 1995 and 1996, average daily oil production increased 13% from 25,718 Bbls for the year ended December 31, 1995 to 29,100 Bbls for the year ended December 31, 1996 and average daily gas production increased 13% from 170,979 Mcf to 193,246 Mcf for the same period. Production Costs. Production costs per BOE decreased in 1996 and 1995 by approximately 5% and 3%, respectively (from $5.00 in 1994 to $4.83 in 1995 to $4.61 in 1996). These reductions are primarily due to Pioneer's concentrated efforts to evaluate and reduce all operating costs and the sale of certain high operating cost properties (see "Asset Dispositions" above). The success of these cost reduction efforts is particularly evident in light of the fact that production costs per BOE declined in 1996 despite a 47% or $.29 per BOE increase in average production taxes per BOE resulting from higher commodity prices. The primary component of production costs, lease operating expense, decreased 14% from $3.99 per BOE in 1995 to $3.43 per BOE in 1996. These costs represent the majority of the oil and gas property operating expenses over which Pioneer has control and the costs on which Pioneer has focused its reduction efforts. Depletion Expense. Depletion expense per BOE decreased 20% in 1996 and increased 3% in 1995. The decrease in depletion expense per BOE in 1996 is primarily the result of the following factors: (i) the significant increase in oil and gas reserves during 1995 and 1996 resulting from Pioneer's exploration and development drilling activities, including revisions, and (ii) a reduction in Pioneer's net depletable basis from charges taken in 1995 in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") (see "Impairment of Oil and Gas Properties" below). The increase in depletion expense per BOE during 1995 is primarily the result of increased depletion rates resulting from the relatively short lives of the properties acquired as part of the Bridge Oil Limited acquisition, when compared to Pioneer's other properties, and the application of such increased rates to the book basis allocated to the proved oil and gas properties acquired. The increase in depletion expense from 1994 to 1995 was mitigated by Pioneer's adoption of SFAS 121 in 1995 and the significant increase in oil and gas reserves at December 31, 1995. Impairment of Oil and Gas Properties. Pioneer adopted SFAS 121 effective as of April 1, 1995, and, as a result of the review and evaluation of its long-lived assets for impairment, Pioneer recognized noncash pre-tax charges of $129.7 million ($84.3 million after-tax) related to its oil and gas properties during 1995. Exploration and Abandonments/Geological and Geophysical Costs. Exploration and abandonments/geological and geophysical costs increased from $20.7 million in 1994 to $27.6 million in 1995 and decreased to $21.7 in 1996. The decrease in 1996 is largely the result of decreased activity, both in exploratory drilling and geological and geophysical activity, resulting from the sale in March 1996 of Pioneer's Australasian assets, offset by increases in geological and geophysical activity in the United States as a result of Pioneer's increased focus on exploitation and exploration activities. The increase from 1994 to 1995 is largely the result of increased expenses, both in exploratory drilling and geological and geophysical costs, brought about by Pioneer's continued evaluation of certain domestic and international exploratory projects acquired as 108 118 part of the Bridge Oil Limited acquisition. The following table sets forth the components of Pioneer's 1996, 1995 and 1994 exploration and abandonments/geological and geophysical costs:
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Exploratory dry holes: United States....................................... $ 6,256 $ 2,491 $ 523 Australia and other foreign......................... 3,431 9,636 3,571 Geological and geophysical costs: United States....................................... 7,042 2,302 3,834 Australia and other foreign......................... 2,012 8,819 4,568 Leasehold abandonments and other...................... 2,966 4,304 8,251 ------- ------- ------- $21,707 $27,552 $20,747 ======= ======= =======
Natural Gas Processing Natural gas processing revenues were $23.8 million in 1996, $33.3 million in 1995 and $39.1 million in 1994; and natural gas processing costs were $12.5 million in 1996, $25.9 million in 1995 and $33.6 million in 1994. The 1996 natural gas processing revenues and costs decreased 29% and 52%, respectively, when compared to the 1995 amounts primarily due to the sale of four gas plants during 1995 and the sale of one gas plant during 1996. The 1995 natural gas processing revenues and costs decreased 15% and 23%, respectively, when compared to the 1994 amounts primarily as a result of the cancellation of certain gas processing contracts related to four gas plants during 1994 and the sale of four plants during 1995. The average price per Bbl of NGLs increased each year, by 30% in 1996 and 6% in 1995 (from $10.97 in 1994 to $11.59 in 1995 to $15.10 in 1996), while the average price per Mcf of residue gas increased by 55% in 1996 and declined by 16% in 1995 (from $1.66 in 1994 to $1.39 in 1995 to $2.15 in 1996). During January 1996, Pioneer realized proceeds of $2.1 million from sales of gas plants and related assets which resulted in Pioneer recognizing a net gain of $639 thousand. In addition, in October 1995, Pioneer sold its interests in the Cargray and Schafer plants located in Carson County, Texas. Pioneer received net proceeds of $9.5 million from the disposition of such plants which resulted in Pioneer recognizing a net gain of $4.6 million. During 1996 and 1994, Pioneer recognized noncash pre-tax charges of $1.3 million and $4.5 million, respectively, related to abandonments of certain of Pioneer's gas processing facilities and the cancellation of certain gas processing contracts. Additionally, during 1995, Pioneer recognized a noncash pre-tax impairment charge of $748,000 related to a natural gas processing facility. General and Administrative Expense General and administrative expense was $28.4 million in 1996, $37.4 million in 1995 and $28.9 million in 1994, representing a 24% decrease from 1995 to 1996 and a 29% increase from 1994 to 1995. The decrease from 1995 to 1996 is primarily due to 1995 including pre-tax charges of $10.6 million associated with the amortization of deferred compensation awarded in 1993 and organizational changes implemented by Pioneer that were designed to reduce overall general and administrative expenses and 1996 reflecting the benefits of those organizational changes as well as additional cost reduction efforts in 1996. The significant increase in general and administrative expense from 1994 to 1995 is partially attributable to significant nonrecurring general and administrative expenses included in each year. The 1995 amount includes the nonrecurring items noted above while the 1994 amount includes $6 million of nonrecurring general and administrative expenses resulting from the acquisition of Bridge Oil Limited, some of which were eliminated as Pioneer consolidated Bridge Oil Limited's United States operations with its own during the latter part of 1994. Not only did total general and administrative expense decrease for the year ended December 31, 1996 as compared to the year ended December 31, 1995, general and administrative costs per BOE declined 109 119 significantly as well, from $1.38 per BOE in 1995 to $1.19 per BOE in 1996, a 14% reduction. This decrease results from Pioneer's improvements in operating efficiencies and increases in its oil and gas production. Interest Expense Interest expense was $46.2 million in 1996, $65.4 million in 1995 and $50.6 million in 1994. The decrease from 1995 to 1996 is due to a decrease of $226.3 million in the weighted average outstanding balance of Pioneer's indebtedness for the year ended December 31, 1996 as compared to the year ended December 31, 1995, resulting primarily from the application of proceeds from the sale of Pioneer's Australasian assets and the sales of certain domestic assets during 1995 and 1996, and a decrease in the weighted average interest rate on Pioneer's indebtedness from 8.02% in 1995 to 7.83% in 1996. The increase from 1994 to 1995 was due primarily to (i) an increase of $109.2 million in the weighted average outstanding balance of Pioneer's indebtedness due to the additional borrowings required to finance the acquisition of Bridge Oil Limited and the properties acquired from PG&E Resources in 1994, (ii) an increase in the weighted average interest rate from 7.15% in 1994 to 8.02% in 1995 and (iii) a full year of interest expense in 1995 versus six months in 1994 associated with certain pre-acquisition obligations of Bridge Oil Limited. In addition, the 1996, 1995 and 1994 amounts include $12 million, $12 million and $9.1 million of interest, respectively, associated with the preferred stock of Pioneer's subsidiary, Parker & Parsley Capital LLC. The 1996, 1995 and 1994 amounts also include $1.3 million, $2 million and $2.3 million, respectively, of amortization of capitalized loan fees. During each of the years 1996, 1995 and 1994, Pioneer was a party to various interest rate swap agreements. As a result, Pioneer recorded a reduction in interest expense of $787 thousand for the year ended December 31, 1996 and additional interest expense of $532 thousand and $2.2 million for the years ended December 31, 1995 and 1994, respectively. Income Taxes Pioneer's income tax provision of $60.1 million for 1996 and its income tax benefit of $45.9 million and $6.5 million (both of which exclude the tax effects related to extraordinary items) for 1995 and 1994, respectively, reflect the net provision or benefit, resulting from the separate tax calculation prepared for each tax jurisdiction in which Pioneer is subject to income taxes. For 1996, 1995 and 1994 Pioneer had effective total tax rates of approximately 30%, 31% and 32%, respectively. In 1996, the effective tax rate is lower than the applicable tax rate as a result of the tax effects of the 1996 sale of certain of Pioneer's subsidiaries. The effective tax rates in 1995 and 1994 are lower than the applicable tax rate for each year because the effective rates reflect the amortization of foreign permanent differences. Extraordinary Items In October 1995, Pioneer transferred cash and certain oil and gas properties with an aggregate estimated value of $1.1 million in full satisfaction of a non-recourse note secured by the properties, the balance of which was approximately $7.7 million. As a result, Pioneer recognized an extraordinary gain on the early extinguishment of debt of $4.3 million (net of related tax expense of $2.3 million). In 1994, Pioneer acquired Bridge Oil Limited and as a result of this acquisition, Pioneer assumed the obligations of certain indentures issued by that company. Upon a change in control of Bridge Oil Limited, those indentures were redeemable for cash at the option of the holder at a one percent premium. The majority of the holders chose to exercise their call option which resulted in the recognition of an after-tax loss on early extinguishment of debt of $628 thousand. Capital Commitments, Capital Resources and Liquidity Capital Commitments. Pioneer's primary needs for cash are for exploration, development and acquisitions of oil and gas properties, repayment of principal and interest on outstanding indebtedness and working capital obligations. 110 120 Pioneer's cash expenditures during the first half of 1997 for additions to oil and gas properties totaled $169.5 million. This amount includes $30.8 million for the acquisition of properties and $138.7 million for development and exploratory drilling. Pioneer's acquisition activities during the first half of 1997 primarily consisted of (i) a 35% interest in approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from UPRC for $26.9 million funded by $11.1 million in cash and a note payable to UPRC of $15.8 million and (ii) an 87% average working interest in the Maude Traylor field in Calhoun County, Texas for approximately $8.8 million. Significant drilling expenditures in the first half of 1997 included $56.2 million in the unitized portion of the Spraberry field of the Permian Basin (including $24.9 million in the Driver unit, $10 million in the Merchant unit, $9.2 million in the North Pembrook unit, $3.8 million in the Preston unit, $3.3 million in the Midkiff unit and $3.2 million in the Shackelford unit) and $9.3 million in other portions of the Spraberry field, $31.2 million in the onshore Gulf Coast region, $21.1 million in other areas of the Permian Basin, $14.8 million in the MidContinent region and $6.1 million internationally in Argentina and Guatemala. Pioneer's cash expenditures during 1996, 1995 and 1994 for additions to oil and gas properties (including individual property acquisitions, but not including company acquisitions) totaled $219.4 million, $215.7 million and $247.1 million, respectively. The 1996 amount includes $198.4 million for development and exploratory drilling, and, as in 1994 and 1995, Pioneer's drilling activities were focused primarily in the Spraberry field of the Permian Basin. Significant drilling expenditures in 1996 included $87.1 million in the unitized portion of the Spraberry field of the Permian Basin (including $46.2 million in the Driver unit, $16.1 million in the Shackelford unit, $7.9 million in the North Pembrook unit, $4.4 million in the Preston unit and $4.1 million in the Merchant unit), $18.2 million in other portions of the Spraberry field, $35.4 million in other areas of the Permian Basin, $31.7 million in the onshore Gulf Coast region, $14.1 million in the MidContinent region and $11.9 million in Argentina and Australia (prior to its sale in March 1996). Additions to natural gas processing facilities during 1996, 1995 and 1994 primarily represented costs associated with Pioneer's Spraberry natural gas processing facilities. Pioneer's 1997 capital expenditure budget has been increased to $335 million, up from the previous budget of $270 million, reflecting planned expenditures of $215 million for exploitation activities, $69 million for exploration activities and $51 million for oil and gas property acquisitions in Pioneer's core areas of Texas, Oklahoma, New Mexico and Louisiana. The significant increase in the capital expenditure budget is indicative of the many exciting exploration, exploitation and acquisition opportunities available to Pioneer. Funding for Pioneer's capital expenditure budget will be primarily provided by cash flows generated by operating activities and by proceeds resulting from Pioneer's ongoing divestiture program for nonstrategic assets . In addition, Pioneer may periodically be required to borrow funds under its $350 million bank facility in order to fund these commitments to the extent that they exceed such internally-generated cash flows. In addition to the above expenditures, an additional $100 million is expected to be spent during the second half of 1997 with respect to activities related to Mesa oil and gas properties. Funding for Pioneer's working capital obligations is provided by internally-generated cash flows. Funding for the repayment of principal and interest on outstanding debt may be provided by any combination of internally-generated cash flows, proceeds from the disposition of nonstrategic assets or alternative financing sources as discussed in "Capital Resources" below. Capital Resources. Pioneer's primary capital resources are net cash provided by operating activities, proceeds from financing activities and proceeds from sales of nonstrategic assets. Pioneer expects that these resources will be sufficient to fund its capital commitments in 1997. Operating Activities. Net cash provided by operating activities was $124.6 million during the six months ended June 30, 1997, consistent with net cash provided by operating activities of $120.6 million for the same period in 1996. Net cash provided by operating activities increased 46% during the year ended December 31, 1996 and 21% in 1995 (from $129.8 million in 1994 to $157.3 million in 1995 to $230.1 million in 1996). These increases are primarily attributable to stronger oil and gas prices combined with declining production costs due to improvements in Pioneer's overall cost structure in 1995 and 1996. Financing Activities. Pioneer had an outstanding balance under its bank facility at June 30, 1997 of $40.6 million (including outstanding letters of credit of $617,000), leaving approximately $309.4 million of 111 121 unused borrowing base immediately available. The weighted average interest rate for the six months ended June 30, 1997 on Pioneer's indebtedness was 7.83% as compared to 7.81% for the six months ended June 30, 1996 (taking into account the effect of interest rate swaps). On July 31, 1996, Pioneer entered into an Amended and Restated Credit Agreement, which has a current borrowing base of $350 million. Interest rates on the facility vary depending on the amount outstanding. The outstanding balance under such Credit Agreement at December 31, 1996 was $9 million leaving approximately $340.1 million of unused borrowing base immediately available, net of outstanding letters of credit of $872 thousand. Pioneer, through its subsidiaries, has other long-term indebtedness, consisting primarily of a $10 million fixed-rate building loan. The weighted average interest rate for the year ended December 31, 1996 on Pioneer's indebtedness was 7.83% as compared to 8.02% for the year ended December 31, 1995 and 7.15% for the year ended December 31, 1994 (taking into account the effect of interest rate swaps). In October 1996, Pioneer announced an odd-lot repurchase program for shareholders who, as of October 7, 1996, individually owned 99 or fewer shares of Pioneer Common Stock. Pioneer purchased a total of 772,986 shares for $23.3 million which were added to Pioneer's shares held in treasury. During 1995, Pioneer completed two public issuances of senior notes. The aggregate net proceeds from the two senior note issuances of approximately $295.9 million were utilized to repay a portion of Pioneer's outstanding U.S. bank indebtedness. At December 31, 1996, the outstanding balances on the notes totaled $299.3 million. During 1994, Pioneer accessed the capital markets on three occasions: the issuance of 3,776,400 6 1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares by Pioneer's wholly-owned special purpose finance subsidiary in March 1994, which resulted in net proceeds of $182.2 million; the issuance of 2,360,000 shares of Common Stock in June 1994, which resulted in net proceeds of approximately $57.6 million; and the issuance of 4,500,000 shares of Common Stock in November 1994, which resulted in net proceeds of approximately $107 million. The net proceeds of each of these offerings were used by Pioneer to reduce the outstanding balance of its bank indebtedness. As Pioneer continues to pursue its strategy, it may utilize alternative financing sources, including the issuance for cash of fixed rate long-term public debt, convertible securities or preferred stock. Pioneer may also issue securities in exchange for oil and gas properties, stock or other interests in other oil and gas companies or related assets. Additional securities may be of a class preferred to common stock with respect to such matters as dividends and liquidation rights and may also have other rights and preferences as determined by the Pioneer Board. On August 7, 1997, the successor to Parker & Parsley and MOC, Pioneer Natural Resources USA, Inc. (the "Borrower"), entered into two Credit Facility Agreements ("Credit Facility Agreements") with a syndicate of banks (the "Banks") that refinanced the credit facilities of Parker & Parsley and Mesa as of the date of merger of the two companies. One Credit Facility Agreement (the "Primary Facility") provides for a $1.1 billion credit facility. The maturity date for the Primary Facility is August 7, 2002. The second Credit Facility Agreement (the "364-day Facility") provides for a $300 million credit facility with a maturity date of August 5, 1998. The Borrower has the option to renew the 364-day Facility for another period of 364 days by notifying the Banks in writing of such election not more than 60 days and not less than 45 days prior to the maturity date. The prior credit agreements of Parker & Parsley and Mesa were paid in full following the Parker/Mesa Merger utilizing proceeds from initial borrowings against the new Primary Facility of $675 million. Sales of Nonstrategic Assets. During the six months ended June 30, 1997 and 1996, proceeds from the sale of domestic nonstrategic assets totaled $12.3 million and $45.9 million, respectively. In addition, during the first half of 1996, Pioneer sold certain Australasian subsidiaries resulting in cash proceeds of $178.7 million. During 1996, 1995 and 1994, proceeds from the sale of domestic nonstrategic assets totaled $58.4 million, $175.1 million and $109 million, respectively. In addition, during 1996, Pioneer sold certain subsidiaries resulting in cash proceeds of $183.2 million. The proceeds from these sales were utilized to reduce Pioneer's 112 122 outstanding bank indebtedness and for general working capital purposes. Pioneer anticipates that it will continue to sell nonstrategic properties from time to time to increase capital resources available for other activities and to achieve administrative efficiencies. Liquidity. At June 30, 1997, Pioneer had $9.8 million of cash and cash equivalents on hand, compared to $18.7 million at December 31, 1996 and $19.9 million at December 31, 1995. Pioneer's ratio of current assets to current liabilities was 1.11 at June 30, 1997 and 1.29 at December 31, 1996 and 1.28 at December 31, 1995. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MESA The following table sets forth selected financial information of Mesa for each of the six months ended June 30, 1997 and 1996 and for the five fiscal years in the period ended December 31, 1996. The unaudited consolidated financial data as of and for the periods ended June 30, 1997 and 1996 have been prepared on a basis consistent with the audited Consolidated Financial Statements and, in the opinion of management, include all adjustments, consisting of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa and the Consolidated Financial Statements of Mesa and the related notes thereto included elsewhere herein.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------- ------------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- ------------ ------------ ---------- (UNAUDITED) (IN MILLIONS, EXCEPT RATIOS AND PER SHARE DATA) Statements of Operations Data: Total operating revenue........ $ 172.1 $ 152.0 $ 311.4 $ 235.0 $ 228.7 $ 222.2 $ 237.1 Total operating expenses....... 124.1 105.6 214.7 187.0 200.0 200.2 210.9 -------- -------- -------- -------- --------- --------- -------- Operating income............... 48.0 46.4 96.7 48.0 28.7 22.0 26.2 -------- -------- -------- -------- --------- --------- -------- Net interest expense (a)....... (47.5) (66.9) (113.4) (132.7) (131.3) (131.3) (129.9) Other income (b)............... (2.5) 26.1 25.0 27.1 19.2 6.9 14.5 -------- -------- -------- -------- --------- --------- -------- Income (loss) from continuing operations (c)............... $ (2.0) $ 5.6 $ 8.3 $ (57.6) $ (83.4) $ (102.4) $ (89.2) -------- -------- --------- --------- -------- Dividends on preferred stock... (11.1) (9.5) -------- -------- Income (loss) from continuing operations applicable to common stock (c)............. $ (13.1) $ (1.2) ======== ======== Income (loss) from continuing operations per common share........................ $ (0.20) $ 0.09 $ (0.02) $ (0.90) $ (1.42) $ (2.61) $ (2.31) ======== ======== ======== ======== ========= ========= ======== Weighted average common shares and common share equivalents outstanding.................. 64.3 64.1 64.2 64.1 58.9 39.3 38.6 Other Financial Data: EBITDAEX (d)................... $ 102.7 $ 135.2 $ 228.6 $ 183.4 $ 160.3 $ 142.4 $ 178.1 Cash flows from operating activities................... 87.8 78.6 101.3 69.2 48.6 32.5 (28.4) Cash flows from investing activities................... (371.7) (19.8) (45.0) (41.4) (40.3) 37.5 (17.0) Cash flows from financing activities................... 288.0 (33.6) (188.7) (22.1) (3.6) (88.5) (29.5) Capital expenditures........... 372.0 19.7 50.2 42.3 32.6 29.6 69.2 Ratio of earnings to fixed charges (e).................. (e) 1.1 (e) (e) (e) (e) (e) Balance Sheet Data (end of period): Working capital................ $ 11.9 $ 18.4 $ 14.8 $ 43.8 $ 115.7 $ 76.2 $ 102.9 Property, plant and equipment, net.......................... 1,351.7 1,048.7 1,046.4 1,104.8 1,130.4 1,191.8 1,280.3 Total assets................... 1,505.5 1,413.5 1,213.9 1,486.8 1,484.0 1,533.4 1,676.5 Long-term debt, including current maturities........... 1,108.3 1,201.7 808.1 1,236.7 1,223.3 1,241.3 1,286.2 Stockholders' equity........... 263.5 73.7 265.5 67.0 124.6 112.1 184.4
- --------------- (a) Net interest expense represents total interest expense less interest income. (b) See "Business of Pioneer -- Management's Discussion and Analysis of Financial Condition and Results of Operations of Mesa -- Results of Operations-- Other Income (Expense)" for additional detail. (c) Loss from continuing operations excludes a $59.4 million ($.92 per common share) extraordinary loss on debt extinguishment for 1996. Net loss attributable to common stock was $60.6 million ($.94 per common share) for the year ended December 31, 1996. Net loss and net loss per share for the years ended December 31, 1995, 1994, 1993 and 1992 and the three months ended March 31, 1997 and 1996 are the same as loss from continuing operations and loss from continuing operations per common share shown above. (d) EBITDAEX is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDAEX (as used herein) is calculated by adding interest, income taxes, depletion, depreciation and amortization, and exploration costs to loss from continuing operations applicable to common stock. Interest includes accrued interest expense and 113 123 amortization of deferred financing costs. EBITDAEX should not be considered as an alternative to earnings (loss) or operating earnings (loss), as defined by generally accepted accounting principles, as an indicator of Mesa's financial performance, as an alternative to cash flow, as a measure of liquidity or as being comparable to other similarly titled measures of other companies. (e) For purposes of calculating the ratio of earnings to fixed charges, earnings are defined as loss from continuing operations applicable to common stock plus fixed charges. Fixed charges consist of interest expense, capitalized interest and preferred stock dividends. Earning were inadequate to cover fixed charges for the years ended December 31, 1996 through 1992 by $1.3 million, $58.5 million, $83.5 million, $105.3 million and $91.6 million, respectively, and for the six months ended June 30, 1997 by $24.2 million. 114 124 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MESA Subsequent to June 30, 1997, the stockholders of Pioneer predecessor entities, Parker & Parsley and Mesa, approved the merger agreement in connection with the Parker/Mesa Merger that resulted in the formation of Pioneer. In accordance with the provisions of Accounting Principles Board No. 16, "Business Combinations", the Parker/Mesa Merger was treated as an acquisition of Mesa by Parker & Parsley. As a result, the historical financial statements of Pioneer are those of Parker & Parsley and will present the addition of Mesa's assets and liabilities as an acquisition by Pioneer in August 1997. The results discussed below relate to the activity of Mesa prior to the Parker/Mesa Merger and are not indicative of future results of Pioneer. 1997 Developments On February 7, 1997, Mesa entered into a stock purchase agreement to purchase 100% of the outstanding capital stock of Greenhill Petroleum Corporation ("Greenhill") from Western Mining Corporation (USA) for $277 million exclusive of the cash acquired. Mesa paid $277 million for Greenhill at the closing of the transaction on April 15, 1997, net of cash acquired. The Greenhill Acquisition was accounted for under the purchase method of accounting. However, because the purchase agreement provides for an effective date of January 1, 1997, Mesa received the benefits of all Greenhill production and cash flow from the effective date to the closing date as part of the assets acquired. Under the purchase agreement, Mesa paid interest on the $270 million purchase price (less the $15 million deposit) at an annual rate of 10% from the effective date to the closing date. The purchase price was subject to adjustment for certain title and environmental matters and the final adjusted purchase price paid was $277 million exclusive of the cash acquired. On February 6, 1997, Mesa purchased all of MAPCO Inc.'s ("MAPCO") condensate and natural gas liquids production in the West Panhandle field for $66 million, effective as of January 1, 1997 (the "Liquids Acquisition"). The Liquids Acquisition has been accounted for under the purchase method of accounting. Results of Operations For the Six Months ended June 30, 1997 and 1996 Mesa reported a net loss applicable to common stock of $13.1 million for the six months ended June 30, 1997, compared with net income of $5.6 million for the same period in 1996. The following table presents a summary of the results of operations of Mesa for the periods indicated (in thousands):
SIX MONTHS ENDED JUNE 30, ------------------------------------ 1997 1996 ---------------- ----------------- Revenues.................................................... $172,137 $151,965 Operating and administrative costs.......................... (64,673) (52,690) Depreciation, depletion and amortization(1)................. (59,417) (52,892) -------- -------- Operating income............................................ 48,047 46,383 Interest expense, net of interest income.................... (47,571) (66,949) Other....................................................... (2,493) 26,170 -------- -------- Net income (loss)........................................... $ (2,017) $ 5,604 Dividends on preferred stock................................ (11,105) -- -------- -------- Net income (loss) applicable to common stock................ $(13,122) $ 5,604 ======== ========
- --------------- (1) Depreciation, depletion and amortization includes impairment of long-lived assets. 115 125 Revenues The table below presents, for the periods indicated, the revenues, production and average prices received from sales of natural gas, natural gas liquids and oil and condensate.
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 -------- -------- Revenues (in thousands): Natural gas............................................... $ 88,810 $ 94,810 Natural gas liquids....................................... 50,439 43,115 Oil and condensate........................................ 26,087 8,847 Other..................................................... 6,801 5,193 -------- -------- Total............................................. $172,137 $151,965 ======== ======== Natural Gas Production (MMcf): Hugoton................................................... 21,608 25,054 West Panhandle............................................ 8,712 9,568 Greenhill................................................. 964 -- Gulf Coast and other...................................... 5,685 8,454 -------- -------- Total............................................. 36,969 43,076 ======== ======== Natural Gas Liquids Production (MBbls): Hugoton................................................... 1,503 1,712 West Panhandle............................................ 1,688 1,457 Gulf Coast and other...................................... 45 71 -------- -------- Total............................................. 3,236 3,240 ======== ======== Oil and Condensate Production (MBbls): West Panhandle............................................ 469 76 Greenhill................................................. 600 -- Gulf Coast and other...................................... 346 402 -------- -------- Total............................................. 1,415 478 ======== ======== Weighted average sales price (1): Natural gas (per Mcf)..................................... $ 2.40 $ 2.17 Natural gas liquids (per Bbl)............................. $ 15.57 $ 13.52 Oil and condensate (per Bbl).............................. $ 18.43 $ 18.55
- --------------- (1) Includes $0.08, $0.13 and $4.15 from hedging natural gas, natural gas liquids and oil and condensate, respectively, in the six months ended June 30, 1997. Mesa's natural gas production declined in 1997 as a result of natural production declines in the Hugoton field and the Gulf Coast and a post-payout reduction in Mesa's working interest in certain Gulf Coast wells in early 1997. Mesa's combined natural gas liquids and oil and condensate production increased in 1997 as a result of the acquisition of condensate and natural gas liquid interests from MAPCO effective January 1, 1997, and the Greenhill Acquisition effective April 15, 1997. Mesa anticipates that total production for 1997 will increase over 1996 as a result of the previously mentioned acquisitions and ongoing development activities. A field compression expansion program currently underway in the Hugoton field is expected to increase production in the second half of 1997. The recently completed East Cameron 322/323 drilling program is also expected to increase Gulf Coast production in the second half of 1997. 116 126 The following table shows the effects of Mesa's hedging activities on its prices for the periods indicated:
SIX MONTHS ENDED JUNE 30, 1997 ---------------------------------- NATURAL NATURAL OIL AND GAS GAS LIQUIDS CONDENSATE ($/MCF) ($/BBL) ($/BBL) ------- ----------- ---------- Actual price received.................................. $2.32 $15.44 $14.28 Effect of hedging...................................... 0.08 0.13 4.15 ----- ------ ------ Average price.......................................... $2.40 $15.57 $18.43 ===== ====== ======
As a result of physical sales contracts and other hedging arrangements, Mesa's estimated fixed price profile is as follows:
PERCENT OF FLOOR CEILING PRODUCTION PRICE PRICE ---------- ------ ------- Last Six Months of 1997 Natural Gas ($/MMBtu net to Mesa).................... 55% $ 2.22 $ 2.24 Natural Gas Liquids ($/Bbl net to Mesa).............. 10% $17.13 $17.13 Crude Oil ($/Bbl NYMEX equivalent)................... 36% $20.56 $22.63 Calendar Year 1998 Natural Gas ($/MMBtu net to Mesa).................... 16% $ 2.67 $ 2.73 Crude Oil ($/Bbl NYMEX equivalent)................... 6% $19.90 $19.90
In addition to these hedges, Mesa entered into an eight-year agreement covering 13,000 MMBtus of natural gas per day beginning January 1, 1997. Under this agreement, Mesa will receive the NYMEX Henry Hub natural gas price plus $0.52 per MMBtu for the first two years and 10% of the NYMEX West Texas Intermediate crude oil price for the remaining six years. Costs and Expenses Mesa's aggregate costs and expenses increased approximately 18% in the six months ended June 30, 1997, compared to the same period in 1996. Lease operating expenses increased as a result of increased field and plant gas usage and an increase in the cost of gas used in operations, higher gathering fees in the West Panhandle, and the addition of costs for the Greenhill properties acquired in the second quarter of 1997. Exploration charges for the six months ended June 30, 1997, increased as compared to the same period in 1996 reflecting the dry hole costs associated with Vermilion 348. General and administrative expenses decreased primarily as a result of lower legal expenses and a significant reduction in personnel in Mesa's natural gas vehicle equipment business and administrative functions. 1996 general and administrative expenses include a $3.6 million charge associated with such reduction in personnel. General and administrative expenses for the six months ended June 30, 1997 include $4.9 million in severance costs paid to Mesa's former chief executive officer. Depreciation, depletion and amortization is calculated quarterly on a unit-of- production basis. Depreciation expense increased as a result of the downward revision of reserves at the end of 1996 and the higher per unit basis in the Greenhill properties. The impairment of long-lived assets for 1997 relates to the sales of Mesa's remaining natural gas vehicles businesses early in the third quarter of 1997. The impairment of long-lived assets for the six months ended June 30, 1996, relates to the adoption of a new accounting requirement (SFAS No. 121) in 1996. Other Income (Expense) Interest income and interest expense in the six-month period ended June 30, 1997, decreased from such income and expense during the same period in 1996 as average cash balances and aggregate debt outstanding decreased. 117 127 Average long-term debt and interest rates for the periods indicated are as follows:
SIX MONTHS ENDED JUNE 30, ---------------- 1997 1996 ----- ------- Average long-term debt outstanding (in millions)............ $954 $1,215 Effective interest rate..................................... 9.3% 11.8%
Results of operations for the six-month period ended June 30, 1997 and 1996, include certain items which are either non-recurring or are not directly associated with Mesa's oil and gas producing operations. The following table sets forth the amounts of such items for the periods indicated (in thousands):
SIX MONTHS ENDED JUNE 30, ------------------ 1997 1996 ------- ------- Gains from investments...................................... $ -- $ 9,349 Gain from adjustment of contingency reserve................. -- 15,000 Other....................................................... (2,493) 1,821 ------- ------- Total other income................................ $(2,493) $26,170 ======= =======
The gains from investments relate to Mesa's investments in marketable securities and energy futures contracts, which included NYMEX futures contracts, commodity price swaps and options that are not accounted for as hedges of future production. Mesa's investments in marketable securities and futures contracts are valued at market prices at each reporting date with gains and losses included in the statement of operations for such reporting period whether or not such gains or losses have been realized. In the mid-to-late 1980's, as a result of regulatory changes, Mesa settled a number of natural gas purchase contracts. At that time, Mesa established a reserve for amounts possibly payable to third parties as a result of the settlements. In 1996, as a result of reaching tentative agreement in negotiation with certain of the parties, Mesa determined that $15 million of the amount previously reserved was no longer required. For the Years Ended December 31, 1996, 1995 and 1994 The following table presents a summary of the results of operations of Mesa for the years indicated:
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- -------- --------- (IN THOUSANDS) Revenues........................................... $ 311,411 $234,959 $ 228,737 Operating and administrative costs................. (111,422) (101,203) (106,330) Depreciation, depletion and amortization........... (103,301) (85,791) (93,724) --------- -------- --------- Operating income................................... 96,688 47,965 28,683 Interest expense, net of interest income........... (113,386) (132,708) (131,300) Other.............................................. 25,037 27,175 19,264 --------- -------- --------- Net income (loss) before extraordinary item........ 8,339 (57,568) (83,353) Extraordinary loss on debt extinguishment.......... (59,386) -- -- --------- -------- --------- Net loss......................................... $ (51,047) $(57,568) $ (83,353) ========= ======== =========
118 128 Revenues, Production and Average Price Data The table below presents, for the years indicated, the revenues, production and average prices received from sales of natural gas, natural gas liquids and oil and condensate.
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Revenues (in thousands): Natural gas.......................................... $184,595 $129,534 $139,580 Natural gas liquids.................................. 97,561 75,321 72,771 Oil and condensate................................... 18,180 19,594 7,877 Helium and other..................................... 11,075 10,510 8,509 -------- -------- -------- Total........................................ $311,411 $234,959 $228,737 ======== ======== ======== Natural Gas Production (MMcf): Hugoton.............................................. 46,821 48,871 51,986 West Panhandle....................................... 19,268 20,357 22,983 Gulf of Mexico....................................... 17,909 8,073 7,359 Other................................................ 3 11 11 -------- -------- -------- Total........................................ 84,001 77,312 82,339 ======== ======== ======== Natural Gas Liquids Production (MBbls): Hugoton.............................................. 3,315 3,524 3,430 West Panhandle....................................... 2,978 2,994 3,423 Gulf of Mexico....................................... 163 48 53 Other................................................ 4 5 5 -------- -------- -------- Total........................................ 6,460 6,571 6,911 ======== ======== ======== Oil and Condensate Production (MBbls): Hugoton.............................................. -- -- -- West Panhandle....................................... 211 118 164 Gulf of Mexico....................................... 665 1,025 337 Other................................................ 63 52 45 -------- -------- -------- Total........................................ 939 1,195 546 ======== ======== ======== Weighted average sales price: Natural gas (per Mcf) Hugoton........................................... $ 2.06 $ 1.32 $ 1.57 West Panhandle.................................... 2.23 1.83 1.80 Gulf of Mexico.................................... 2.58 1.59 1.81 Other............................................. .77 .54 1.29 -------- -------- -------- Total........................................ $ 2.19 $ 1.65 $ 1.67 ======== ======== ======== Natural gas liquids (per Bbl) Hugoton.............................................. $ 14.60 $ 10.76 $ 10.03 West Panhandle....................................... 16.06 12.33 11.06 Gulf of Mexico....................................... 15.51 11.37 11.52 Other................................................ 13.96 8.77 8.58 -------- -------- -------- Average*.......................................... $ 15.21 $ 11.48 $ 10.55 ======== ======== ========
119 129
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Oil and condensate (per Bbl) Hugoton.............................................. $ -- $ -- $ -- West Panhandle....................................... 18.74 14.13 13.38 Gulf of Mexico....................................... 19.95 16.57 15.18 Other................................................ 20.07 16.48 14.43 -------- -------- -------- Average*.......................................... $ 19.39 $ 16.32 $ 14.58 ======== ======== ========
- --------------- * Includes the effects of hedging activities. See "-- Natural Gas Prices." Total revenues from sales of natural gas, NGLs and oil and condensate increased from 1995 to 1996 primarily due to increased prices received in 1996. The increase in total revenues from sales of natural gas, NGL, and oil and condensate from 1994 to 1995 is primarily attributable to increased oil and condensate production in 1995, increased liquids prices in 1995 and approximately $12.7 million of natural gas hedge gains recognized in 1995. These factors offset the decrease in natural gas and natural gas liquids production and the lower market prices for natural gas production in 1995. Natural Gas Revenues. Natural gas revenues increased by 42% from 1995 to 1996. Average prices were significantly higher in 1996 than in 1995. The average price received for market price-based production was $0.81 per Mcf, or 61%, higher in 1996 than in 1995. Mesa's hedge losses decreased the reported prices for such production by $0.02 per Mcf in 1996. The higher market prices in 1996 were the result of increased demand primarily due to a colder than normal 1995/1996 winter. Natural gas production from the Gulf of Mexico increased 122% from 1995 to 1996 due to the South Marsh Island drilling program. Natural gas revenues decreased by 7% from 1994 to 1995. In 1995 production was lower in both the Hugoton and West Panhandle fields due to timing and duration of equipment maintenance and weather-related reduction in demand, respectively. Average natural gas prices were slightly lower in 1995 than in 1994. The average price received for market price-based production was $0.22 per Mcf, or 14%, lower in 1995 than in 1994. Mesa's hedge gains increased the reported prices for such production by $0.20 per Mcf in 1995. The lower market prices in 1995 were a function of a surplus supply of natural gas. See "-- Natural Gas Prices." NGL Revenues. NGL revenues increased by 29% from 1995 to 1996. Average prices in 1996 were 32% higher than in 1995 due to improved market conditions. The increase in prices was partially offset by a 2% decline in production. NGL revenues increased by 4% in 1995 compared to 1994. Hugoton field NGL production was slightly higher despite lower natural gas production reflecting improved yields from the Satanta Plant. West Panhandle field NGL production decreased in 1995 in proportion to the lower natural gas production. The lower production was offset by higher average prices in 1995 due to improved market conditions for NGLs. Oil and Condensate Revenues. Oil and condensate revenues were slightly lower in 1996 than in 1995. Oil production in the Gulf of Mexico was down 35% due to natural oil production decline from the successful drilling in 1994. The production decrease was offset by an increase of 19% in average prices received in 1996 compared to 1995 due to improved market conditions. Oil and condensate revenues increased approximately 150% from 1994 to 1995. Gulf of Mexico production increased in late 1994 due to successful drilling results. Average oil and condensate prices were also higher in 1995 by $1.74 per Bbl. 120 130 Natural Gas Prices. Substantially all of Mesa's natural gas production is sold under short or long-term sales contracts. The following table shows Mesa's natural gas production sold under fixed price contracts and production sold at market prices:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ Natural gas production (MMcf): Sold under fixed price contracts......................... 5,198 15,212 13,935 Sold at market prices.................................... 78,803 62,100 68,404 ------ ------ ------ Total production............................... 84,001 77,312 82,339 ====== ====== ====== Percent sold at market prices............................ 94% 80% 83% ====== ====== ======
In addition to its fixed price contracts, Mesa will, when circumstances warrant, hedge the price received for its market-sensitive production through natural gas futures contracts, swaps and other financial instruments as well as physical sales arrangements. The following table shows the effects of Mesa's fixed price contracts and hedging activities on its natural gas prices:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ Average natural gas prices (per Mcf): Fixed price contracts..................................... $3.21 $2.12 $2.16 Market prices received.................................... 2.14 1.33 1.55 Hedge gains (losses)...................................... (.02) .20 .01 ----- ----- ----- Total market prices............................... $2.12 $1.53 $1.56 ----- ----- ----- Total average prices.............................. $2.19 $1.65 $1.67 ===== ===== =====
The average natural gas prices under fixed price contracts increased in 1996 due to the expiration of certain lower priced contracts in 1995. Gains and losses from hedging activities are included in natural gas revenues when the applicable hedged natural gas is produced. Mesa recognized losses from hedging activities of $1.8 million in 1996, and gains of $12.7 million in 1995 and $895,000 in 1994. Costs and Expenses Mesa's aggregate costs and expenses increased by approximately 15% from 1995 to 1996. Lease operating expenses increased 10% from 1995 to 1996 due to higher production and fuel costs in the West Panhandle and Hugoton fields and slightly higher overall production. Production and other taxes increased 9% from 1995 to 1996 due to increased revenues partially offset by lower tax rates for Hugoton field production. Exploration charges in 1996 were lower than in 1995 due to a greater emphasis being placed on lower risk development drilling throughout 1996. General and administrative ("G&A") expenses increased in 1996 due to a $9.3 million charge relating to a reduction in personnel associated with the Recapitalization, partially offset by lower costs resulting from the personnel reduction and lower legal expenses. Depreciation, depletion and amortization ("DD&A") expense, which is calculated quarterly on a unit-of-production basis, was higher primarily due to a decrease in estimated reserves and an impairment of long-lived assets of approximately $6.8 million in connection with the adoption of a new accounting standard (SFAS No. 121). Mesa's aggregate costs and expenses declined by approximately 7% from 1994 to 1995. Lease operating expenses declined marginally due to decreased production. Production and other taxes decreased 14% from 1994 to 1995 due to decreased production in the Hugoton and West Panhandle fields and lower tax rates for Hugoton field production in 1995. Exploration charges in 1995 were greater than in 1994 reflecting increased exploration activities in the Gulf of Mexico and consist primarily of exploratory dry-hole expense. G&A 121 131 expenses were lower in 1995 than in 1994 primarily due to lower legal expenses and a reduction in employee benefit expenses. DD&A expense was lower in 1995 than in 1994 primarily due to lower equivalent production in 1995, oil and gas reserve increases in the Hugoton and West Panhandle fields in the fourth quarters of 1994 and 1995, and additional reserve discoveries in the Gulf of Mexico in 1994 and 1995. The table below presents Mesa's total production costs (lease operating expenses and production and other taxes) by area of operation for each of the years ended December 31 (in thousands, except per Mcf of natural gas equivalent data):
1996 1995 1994 --------------- --------------- --------------- PER PER PER TOTAL MCFE TOTAL MCFE TOTAL MCFE ------- ----- ------- ----- ------- ----- Lease operating expense: Hugoton...................................... $13,545 $ .20 $12,703 $ .18 $12,549 $ .17 West Panhandle............................... 28,896 .75 25,989 .67 26,910 .60 Gulf of Mexico............................... 10,476 .46 9,848 .68 11,136 1.15 Other........................................ 1,530 3.79 907 2.57 623 2.00 ------- ----- ------- ----- ------- ----- 54,447 .42 49,447 .40 51,218 .40 ------- ----- ------- ----- ------- ----- Production and Other Taxes: Hugoton...................................... 16,297 .24 15,004 .21 17,505 .24 West Panhandle............................... 3,472 .09 3,216 .08 3,099 .07 Gulf of Mexico............................... 19 -- 34 -- 68 .01 Other........................................ 283 .70 149 .42 634 2.04 ------- ----- ------- ----- ------- ----- 20,071 .16 18,403 .15 21,306 .17 ------- ----- ------- ----- ------- ----- Total production costs............... $74,518 $ .58 $67,850 $ .55 $72,524 $ .57 ======= ===== ======= ===== ======= =====
Other Income (Expense) Interest expense in 1996 was $27.5 million lower than in 1995 due to lower average aggregate debt outstanding at lower average interest rates. Average aggregate debt outstanding and average interest rates fell to $1,036.0 million and 11.34%, respectively, from $1,246.9 million and 11.64% in 1995. Interest expense in 1995 was not materially different from 1994 as average aggregate debt outstanding and average interest rates did not change materially. Non-cash interest expense representing accretion of discount on long-term debt totaled $8 million, $39 million and $79 million in 1996, 1995 and 1994, respectively. Interest income decreased $8.2 million from 1995 to 1996 due to lower average cash balances in 1996. Interest income increased from $13.5 million in 1994 to $15.9 million in 1995 as a result of higher average cash balances and higher average interest rates earned on these cash balances in 1995. Results of operations for the years 1996, 1995, and 1994 include certain items which are either non-recurring or are not directly associated with Mesa's oil and gas producing operations. The following table sets forth the amounts of such items (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Gains from investments...................................... $ 9,418 $18,420 $ 6,698 Gains from collections from Bicoastal Corporation........... 2,548 6,352 16,577 Gain from adjustment of contingency reserve................. 15,000 -- -- Other....................................................... (1,929) 2,403 (4,011) ------- ------- ------- Total other income................................ $25,037 $27,175 $19,264 ======= ======= =======
The gains from investments relate primarily to energy futures contracts, which include New York Mercantile Exchange ("NYMEX") futures contracts, commodity price swaps and options that are not accounted for as hedges of future production. Mesa's investments in marketable securities and futures contracts are valued at market prices at each reporting date with gains and losses included in the statement of 122 132 operations for such reporting period whether or not such gains or losses have been realized. Gains from collections from Bicoastal Corporation represent returns on Mesa's investment in Bicoastal subsequent to the confirmation of its bankruptcy plan. No additional payments from Bicoastal are expected. In the second quarter of 1996, Mesa revalued certain contingencies associated primarily with contracts which were settled in the mid-to-late 1980s. As a result of the revaluation, Mesa recorded a gain of $15 million in the second quarter of 1996. Production Allocation Agreement Effective January 1, 1991, Mesa entered into the Production Allocation Agreement ("PAA") with Colorado Interstate Gas Company ("CIG") which allocates 77% of the production from the West Panhandle field to Mesa and 23% to CIG. During 1996, 1995, and 1994, Mesa produced and sold 72%, 71%, and 69%, respectively, of total production from the field; the balance of field production was sold by CIG. Mesa records its 77% ownership interest in natural gas production as revenue. The difference between the net value of production sold by Mesa and the net value of its 77% entitlement is accrued as a gas balancing receivable. The revenues and costs associated with such accrued production are included in results of operations. The following table presents the incremental effect on production and results of operations from entitlement production recorded in excess of actual sales as a result of the PAA (dollars in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Revenues accrued............................................ $ 8,112 $ 4,260 $ 8,662 Costs and expenses accrued.................................. (2,766) (1,576) (3,075) ------- ------- ------- Recorded to receivable...................................... 5,346 2,684 5,587 ------- ------- ------- Depreciation, depletion and amortization.................... (2,546) (1,680) (3,713) ------- ------- ------- Total............................................. $ 2,800 $ 1,004 $ 1,874 ======= ======= ======= Production Accrued: Natural gas (MMcf)........................................ 1,734 1,155 2,386 Natural gas liquids (MBbls)............................... 269 171 355
At December 31, 1996, the long-term gas balancing receivable under the PAA due from CIG was $47.9 million net of accrued costs which is included in other assets in the consolidated balance sheet. Approximately $18 million of the long-term gas balancing receivable relating to the PAA is attributable to MAPCO's interest in liquids purchased by Mesa pursuant to the Liquids Acquisition. The provisions of the PAA allow for periodic and ultimate cash balancing to occur. The PAA also provides that CIG may not take in excess of its 23% share of ultimate production. Capital Resources and Liquidity In August of 1996, Mesa completed a recapitalization (the "Recapitalization") of its balance sheet by issuing new equity and repaying and refinancing substantially all of its then existing long-term debt. The Recapitalization included (i) a sale by private placement of approximately 58.8 million shares of a new class of Series B Preferred Stock for $133 million to DNR, whose sole general partner is Rainwater, Inc., a Texas corporation owned by Richard E. Rainwater, and (ii) the issuance to Mesa's then existing stockholders of rights (the "Rights Offering") to purchase a new class of Series A Preferred Stock. The Rights Offering was substantially over subscribed and resulted in such stockholders' purchase of approximately 58.6 million shares of Series A Preferred Stock for $132 million. In addition, as part of the Recapitalization, Mesa entered into the new seven-year $525 million Credit Facility with a group of banks, issued and sold $475 million of senior subordinated notes consisting of $325 million of 10 5/8% senior subordinated notes due in 2006 and $150 million initial accreted value of 11 5/8% senior subordinated discount notes due in 2006. The Recapitalization enhances Mesa's ability to compete in the oil and gas industry by substantially increasing its cash flow available for investment and improving its ability to attract capital. The ability to 123 133 redirect cash flow to acquisition, exploitation and exploration activities and plant expansion rather than debt service allows Mesa to pursue its aggressive growth strategy. Specifically, Mesa's financial condition improved significantly as a result of the Recapitalization due to (i) a significant reduction in total debt outstanding (see table below), (ii) a reduction in annual cash interest expense through lower debt balances and lower interest rates, and (iii) the extension of maturities on its long-term debt. Mesa Operating Co., a Delaware corporation and a wholly-owned subsidiary of Mesa, is the borrower under the Credit Facility and the issuer under the senior subordinated notes and the senior discount notes. Mesa is the guarantor on the Credit Facility and on both the senior subordinated notes and the senior discount notes. The Credit Facility is secured by liens on substantially all of Mesa's assets and matures on June 30, 2003. Borrowings under the Credit Facility bear interest, at Mesa's option, at Interbank Eurodollar rates plus 1 1/2%, CD rates plus 1 1/2%, Fed Funds rates plus 1% or the prime rate plus 1/2%. Mesa has entered into a two-year interest rate swap ending on August 28, 1998, that fixes the interest rate on $250 million of borrowings under the Credit Facility at approximately 7 3/4%. The borrowing base for the Credit Facility is determined based on the value of Mesa's proved oil and gas reserves and was initially set at $525 million. The borrowing base at December 31, 1996 was $525 million and, as of such date, $319 million was outstanding under the Credit Facility. Mesa currently has a commitment letter from The Chase Manhattan Bank, N.A. to amend and restate the Credit Facility to increase the total amount of the Credit Facility to $650 million in connection with the Greenhill Acquisition. Borrowings under the Credit Facility will be used to fund the Greenhill Acquisition. The Credit Facility restricts, among other things, Mesa's ability to incur additional indebtedness, create liens, pay dividends, acquire stock or make investments, loans or advances. The amounts outstanding under the senior subordinated notes and the senior discount notes at December 31, 1996 were approximately $325 million and $159 million, respectively, and both the senior subordinated notes and the senior discount notes are unsecured and mature in 2006. The senior subordinated notes bear interest at a rate of 10 5/8%, payable semiannually. The senior discount notes do not accrue interest until July 1, 2001, however, the accreted value of such notes will increase at a rate of 11 5/8% compounded semiannually until such date. Beginning July 1, 2001, the senior discount notes will bear interest at a rate of 11 5/8% compounded semiannually. Prior to July 1, 1999, Mesa may, at its option, on any one or more occasions, redeem up to 33 1/3% of the aggregate principal amount of each of the senior subordinated notes and the senior discount notes at a redemption price equal to 110% of the principal amount or accreted value thereof with proceeds of equity offerings. The indentures governing the senior subordinated notes and the senior discount notes contain certain covenants that, among other things, limit the ability of Mesa and its restricted subsidiaries to incur additional indebtedness and issue redeemable stock, pay dividends, make investments, make certain other restricted payments, enter into certain transactions with affiliates, dispose of assets, incur liens and engage in Parker/Mesa Merger and consolidations. Summarized long-term debt (in thousands) and year-end interest rates are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- --------------------- AVERAGE AVERAGE INTEREST INTEREST BALANCE RATE BALANCE RATE -------- -------- ---------- -------- Fixed Rate Debt................................ $483,772 10.95% $1,170,307 11.7% Variable Rate Debt............................. 319,000 7% 61,131 8.25% Other.......................................... 5,305 N/A 5,305 N/A -------- ---------- Total................................ $808,077 $1,236,743 ======== ==========
Cash Flow from Operating Activities Net cash provided by operating activities increased 46% from 1995 to 1996 primarily as a result of sales of investments and a reduction in net loss as compared to 1995 before extraordinary, non-operating, loss on debt 124 134 extinguishment. Net cash provided by operating activities increased 30% from 1994 to 1995 primarily as a result of the $43 million litigation settlement in 1994. Price Risk Management In order to mitigate the potential negative effects of volatile commodity prices, Mesa entered into over-the-counter commodity and natural gas basis swap agreements with financial institutions and gas marketing companies. A commodity swap has the effect of fixing the absolute price or setting a trading range for a specific product. A natural gas basis swap "fixes" the differential between Mesa's physical gas delivery points and the NYMEX Henry Hub. As a result of physical sales contracts and other hedging arrangements, Mesa's estimated fixed price profile is as follows:
PERCENT OF FLOOR CEILING PRODUCTION PRICE PRICE ---------- ------ ------- Last Six Months of 1997 Natural Gas ($/MMBtu net to Mesa)......................... 55% $ 2.22 $ 2.24 Natural Gas Liquids ($/Bbl net to Mesa)................... 10% $17.13 $17.13 Crude Oil ($/Bbl NYMEX equivalent)........................ 36% $20.56 $22.63 Calendar Year 1998 Natural Gas ($/MMBtu net to Mesa)......................... 16% $ 2.67 $ 2.73 Crude Oil ($/Bbl NYMEX equivalent)........................ 6% $19.90 $19.90
In connection with acquisitions, Mesa has and Pioneer expects to continue to enter into hedging arrangements for all or a portion of the production on the acquired properties. Regarding the Greenhill Acquisition, Mesa hedged approximately 100% of its 1997 expected natural gas production at approximately $2.60 per MMBtu and approximately 30% of Greenhill's projected crude oil production at approximately $22.60 per barrel. Through the use of a collar, Mesa created a $19.25 floor and a $25.50 cap for approximately 20% of the 1997 expected Greenhill crude oil production. For the year 1998, Mesa fixed approximately 40% of the projected Greenhill natural gas production around $2.35. With respect to the Liquids Acquisition, Mesa sold approximately 100% of the crude oil and natural gas liquids at a net price of $21.00 per barrel and $18.66 per barrel, respectively, for the first three quarters of 1997. In addition to these hedges, Mesa entered into an eight year agreement for 13,000 MMBtus of natural gas per day beginning in early 1997. Under this agreement, Mesa will receive NYMEX Henry Hub plus $0.52 per MMBtu for the first two years and 10% of the NYMEX WTI crude oil price for the remaining six years. Net Operating Loss Carryforwards At December 31, 1996, Mesa had a regular tax net operating loss ("NOL") carryforward of approximately $560 million. Additionally, Mesa had an alternative minimum tax loss carryforward available to offset future alternative minimum taxable income of approximately $535 million. If not used, these carryforwards will expire between 2007 and 2011. As a result of the Recapitalization, Pioneer's ability to carry forward Mesa's NOLs is subject to the limitations of Section 382 of the Internal Revenue Code of 1986, which, in general, limits the utilization of NOL carryforwards subsequent to a substantial change (generally more than 50%) in corporate stock ownership. Notwithstanding the above limitations, Pioneer expects the NOLs available in 1997 to be sufficient to offset any taxable income that may be generated in 1997. Other Pioneer, as did its predecessor, Mesa, recognizes its ownership interest in natural gas production as revenue. Actual production quantities sold may be different from Pioneer's ownership share of production in a given period. Pioneer records these differences as gas balancing receivables or as deferred revenue. Mesa's net gas balancing overproduction represented less than 1% of total equivalent production for the six months ended 125 135 June 30, 1997, compared with net gas balancing underproduction amounting to approximately 3.7% of total equivalent production during the same period in 1996. The gas balancing receivable or deferred revenue component of natural gas and natural gas liquids revenues in future periods is dependent on future rates of production, field allowables and the amount of production taken by Pioneer or by its joint interest partners. See Mesa's Financial Statements and related notes included elsewhere herein for information regarding the status of certain pending litigation. Management does not anticipate that inflation will have a significant effect on Pioneer's operations. Mesa believes that the costs for compliance with current environmental laws and regulations have not had and will not have a material effect on Mesa's or Pioneer's financial position or results of operation. The Financial Accounting Standards Board has recently issued several new accounting standards. The standards are not anticipated to significantly impact the financial results of Mesa. BUSINESS DESCRIPTION Recent Developments Greenhill Acquisition. On April 15, 1997, Pioneer's predecessor, Mesa, acquired all of the outstanding capital stock of Greenhill. As of December 31, 1996, Greenhill's properties, which are concentrated in four producing areas, had estimated proved reserves of approximately 23 MMBbls of oil and 42 Bcf of gas or an aggregate of approximately 30 MMBOE. The estimated future net cash flows before income taxes from the Greenhill reserves, as of December 31, 1996, aggregated approximately $441 million and had a net present value, discounted at 10%, of approximately $300 million. For the year ended December 31, 1996, net production from the Greenhill reserves was 2.5 MMBbls of oil and 6.0 Bcf of gas. These properties have had cumulative historical production of over 930 MMBOE. The Greenhill properties are concentrated in the inland waters of Louisiana, the Texas Gulf Coast, offshore in the Gulf of Mexico and in the Permian Basin, with approximately 48% of the reserves in inland waters of Louisiana, 12% in the Texas Gulf Coast, 11% offshore in the Gulf of Mexico and 28% in the Permian Basin. Pioneer operates over 90% of its properties. The Greenhill properties include 522 producing wells, over 200 development projects, significant exploration potential, including a number of subsalt and deeper zone drilling prospects, and extensive 3-D seismic data on approximately 52,800 gross acres (49,000 net acres). Pioneer has currently identified 45 development wells and 132 recompletions on the Greenhill properties, and expects to initiate 44 of these projects in 1997 and at least 25 in 1998. The projects will require an investment of at least $65 million during 1997 and 1998. With the additional development projects, Pioneer expects to increase net production from the Greenhill properties from the current 9,300 BOE per day, to over 12,000 BOE per day in 1998. In addition, Pioneer has identified a number of exploration opportunities, including a deeper zone and two subsalt prospects, which Pioneer expects to evaluate further with advanced 3-D seismic data processing. The three fields located in Louisiana, Timbalier Bay, Grand Bay and Delta Farms, are considered giant fields by industry standards having historical cumulative production of more than 100 MMBOE each with Timbalier Bay being the third largest field in Louisiana having historical cumulative production of more than 390 MMBOE. The Timbalier Bay and Grand Bay fields both lie on the flanks of the Terrebonne Trough, the most prolific depositional basin in Louisiana. This Miocene basin has produced over 24 Tcf and 13 billion barrels of oil historically. The combination of the size and structural and stratigraphic complexity of these fields has resulted in large numbers of distinct reservoirs and fault blocks in each field, which lend themselves to further exploration and exploitation using 3-D seismic data. The Eugene Island 208 field, located in federal waters offshore, is a salt dome with complex faulting separating the producing reservoirs. Pioneer expects to use 3-D seismic data to identify and exploit hydrocarbon accumulations in each of these fields. 126 136 The Texas Gulf Coast properties are concentrated in three areas: the Rich Ranch area located in Liberty County and the Linscomb and Bobcat Run areas located in Orange County. A new 3-D survey is under evaluation over the Rich Ranch field which is expected to assist in defining additional structural and stratigraphic opportunities. The Permian Basin interests consist of five active water flood field units and four other non-unitized leases in Lea County, New Mexico, and Andrew and Yoakum Counties, Texas, three of which hold potential for increased oil recovery through CO(2) flooding. The Greenhill properties include more than 150 square miles of proprietary modern 3-D seismic data covering Timbalier Bay and Grand Bay fields, a speculative seven square mile 3-D survey over the Linscomb and Bobcat Run fields and a newly shot 11 square mile 3-D seismic survey at Rich Ranch. Pioneer plans to conduct further 3-D seismic surveys over the Greenhill properties to assist in its exploitation and exploration efforts. Liquids Acquisition. On February 6, 1997, Pioneer's predecessor, Mesa, purchased all of the condensate and NGL production interests in the West Panhandle field of MAPCO Inc. for $66 million. The Liquids Acquisition, effective as of January 1, 1997, increases Pioneer's interest in NGLs produced from the West Panhandle field properties that Pioneer operates to approximately 96%. Pioneer has been recovering such NGLs at its Fain plant since December 1996 and Pioneer believes that the Liquids Acquisition is an important step in Pioneer's strategic objective of expanding its NGL and gas processing business. The transaction is expected to result in 850,000 Bbls of additional production in 1997 and the addition of an estimated 11 MMBbls of proved reserves in 1997. Financial Management Pioneer strives to maintain its outstanding indebtedness at levels whereby it maintains sufficient financial flexibility for future exploration, development and acquisition opportunities. While Pioneer may occasionally incur higher levels of debt to take advantage of opportunities, management's objective is to maintain a flexible capital structure and to strengthen Pioneer's financial position by reducing debt through an increase in equity capital or through the divestiture of nonstrategic assets. If the Transaction described in this Joint Proxy Statement is consummated, Pioneer will have achieved a leverage ratio that is in line with its target of a debt to book capitalization ratio of 40%, on a pro forma combined basis as of June 30, 1997. Properties The information included under this heading "Properties" has been prepared to give effect to the combination of Parker & Parsley and Mesa (including the Greenhill Acquisition). Reserves. Pioneer had proved reserves of over 600 MMBOE at December 31, 1996, comprised of 1.9 Tcf of natural gas and 282 MMBbls of crude oil and liquids, with an SEC PV10 of approximately $4.4 billion. On a BOE basis, 86% of Pioneer's total proved reserves at December 31, 1996 are proved developed reserves. Pioneer operates approximately 85% of its total proved reserves based on the December 31, 1996 SEC PV10. Based on reserve information as of December 31, 1996, and using Pioneer's reserve report production information for 1997, the reserve-to-production ratio associated with Pioneer's proved reserves is approximately 12 years on a BOE basis. In addition, proved NGLs of 12.6 million Bbls were attributable to Pioneer's interests in gas processing rights in reserves contractually or economically dedicated to Pioneer's natural gas processing plants at December 31, 1996. The SEC PV10 from those dedicated proved reserves was $44.3 million at December 31, 1996 (using a constant weighted average price of $11.46 per Bbl and a 10% discount rate). For the year ended December 31, 1996, average daily production from Pioneer's interests in natural gas processing plants was 2,327 Bbls of NGLs. 127 137 The following table summarizes (a) the estimated proved reserves and estimated future cash flows associated with Pioneer's oil and gas properties by major area of operation as of December 31, 1996, and (b) the average daily production associated with Pioneer's oil and gas properties by significant reserve base during 1996, in each case as estimated in accordance with the definitional requirements under rule 4-10(a) of Regulation S-X.
COMBINED COMBINED PROVED RESERVES 1996 AVERAGE AS OF DECEMBER 31, 1996 DAILY PRODUCTION(A) ------------------------------------------ -------------------------- NATURAL SEC 10 NATURAL OIL GAS VALUE OIL GAS (MBBLS) (MMCF) MBOE (000) (BBLS) (MCF) BOE ------- --------- ------- ---------- ------ ------- ------- United States: Hugoton.................... 45,418 691,412 160,653 $1,129,700 9,057 127,926 30,378 Spraberry.................. 112,301 284,576 159,730 1,119,950 17,638 42,182 24,668 West Panhandle............. 46,469 288,444 94,543 611,400 8,713 52,645 17,487 Permian.................... 41,391 119,710 61,343 515,461 8,606 35,481 14,520 Gulf Coast................. 4,345 252,335 46,401 445,337 2,166 92,309 17,551 MidContinent............... 2,769 167,120 30,622 238,400 1,294 31,813 6,596 Greenhill.................. 23,430 41,897 30,413 300,259 6,831 16,393 9,563 Houston.................... 2,308 27,332 6,863 67,600 2,262 48,932 10,417 Other...................... 2,749 35,061 8,593 45,080 184 202 218 ------- --------- ------- ---------- ------ ------- ------- 281,180 1,907,887 599,161 4,473,187 56,751 447,883 131,398 Australia(b)................. -- -- -- -- 955 5,265 1,833 Argentina.................... 1,105 1,108 1,290 8,041 145 -- 145 ------- --------- ------- ---------- ------ ------- ------- Total.............. 282,285 1,908,995 600,451 $4,481,228 57,851 453,148 133,376 ======= ========= ======= ========== ====== ======= =======
- --------------- (a) The 1996 average daily production is calculated using a 366-day year and without making pro forma adjustment for any acquisitions, divestitures or drilling activity that occurred during the year. (b) Represents production associated with Pioneer's Australian subsidiaries prior to their divestiture in 1996. The estimates of Pioneer's proved reserves as of December 31, 1996, are based upon (a) with respect to the former Parker & Parsley properties, (i) reserve reports audited by Netherland, Sewell & Associates, Inc., independent reserve engineers, for Parker & Parsley's major domestic properties (which represented approximately 52% of the total SEC PV10 of Parker & Parsley's domestic proved reserves at December 31, 1996), and (ii) reserve reports prepared by Parker & Parsley's engineers for all other Parker & Parsley domestic properties and its Argentine properties, and (b) with respect to the former Mesa properties, (i) the reserve report of Williamson Petroleum Consultants, Inc., independent reserve engineers, with respect to Mesa's reserves in the Hugoton and West Panhandle fields, which represented approximately 95% of Mesa's total proved reserves, and (ii) the report of Mesa's internal reserve engineers with respect to Mesa's Gulf of Mexico, Greenhill and other properties. The estimate of the reserves related to Pioneer's interests in natural gas processing rights for proved reserves contractually or economically dedicated to Pioneer's natural gas processing plants is based on evaluations prepared by Pioneer's engineers. Numerous uncertainties exist in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond Pioneer's control. This Joint Proxy Statement contains estimates of Pioneer's proved oil and gas reserves and the related future net revenues therefrom, which are based on various assumptions, including those prescribed by the SEC. Actual future production, oil and gas prices, revenues, taxes, capital expenditures, operating expenses, geologic success and quantities of recoverable oil and gas reserves may vary substantially from those assumed in the estimates and such variances may be material. In addition, Pioneer's reserves may be subject to downward or upward revisions based on production performance, purchases or sales of properties, results of future development, prevailing oil and gas prices and other factors. Therefore, estimates of the SEC PV10 of proved 128 138 reserves contained in this Joint Proxy Statement should not be construed as estimates of the current market value of Pioneer's proved reserves. Pioneer has not provided, and Parker & Parsley did not provide during 1996, estimates of total proved oil and gas reserves to any federal authority or agency, other than the SEC. During 1996, Pioneer's predecessor, Mesa, filed a Form EIA-23, which included reserve estimates as of December 31, 1995, with the Energy Information Administration of the Department of Energy. Description of Properties. Pioneer manages its domestic oil and gas properties based upon their geographic area, and, as a result, Pioneer has divided its domestic operations into six operating divisions: the Spraberry Division, the Permian Division, the MidContinent Division, the West Panhandle Division, the Houston Division and the Gulf Coast Division. In addition, Pioneer has an international group that manages Pioneer's ownership in oil and gas properties outside the United States. At December 31, 1996, Pioneer's only properties outside the U.S. were located in Argentina. - Spraberry Division. The Spraberry field was discovered in 1949 and encompasses eight counties in West Texas. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average Btu content of 1,400 Btu per Mcf. The oil and gas is produced from three formations, the upper and lower Spraberry and the Dean, at depths ranging from 6,700 feet to 9,200 feet. The center of the Spraberry field was unitized in the late 1950's and early 1960's by the major oil companies but until the late 1980's experienced very limited development activity. Pioneer has focused its acquisition and development drilling activities in the unitized portion of the Spraberry field due to the dormant condition of the properties and the high net revenue interests available. Pioneer believes the area offers excellent opportunities to enhance oil and gas reserves because of the hundreds of undeveloped infill drilling locations and the ability to reduce operating expenses through economies of scale. In February 1997, the Texas Railroad Commission (which regulates oil and gas production) entered a favorable order on an application by Pioneer's predecessor, Parker & Parsley, to allow administrative approval of uncontested applications to increase the density of drilling in the Spraberry field from one well per 80 acres to one well in 40. Pioneer believes such reduced spacing may provide in excess of 1,000 additional drilling locations which based on Pioneer's drilling results on 40-acre spacing to date, have the potential to add 70 million equivalent barrels to Pioneer's reserve base. Pioneer continues to realize the benefits of its focus on the Spraberry field through significant reserve additions due to development drilling and identification of a large number of new drilling locations each year. As a result, Pioneer plans to continue to devote a great deal of its capital budget and operating resources to the ongoing development of the Spraberry field. Specifically, Pioneer has allocated $88 million of its 1997 exploration and development budget to drill approximately 225 development wells and to perform approximately 50 recompletions in the Spraberry field. - Permian Division. Pioneer is involved in acquisition and development activities in the Permian Division which includes all of West Texas and Southeastern New Mexico except for the Spraberry field. The Iatan field in Mitchell County, Texas, the Lusk and Dagger Draw fields in Eddy County, New Mexico, the Abell (Devonian) field in Crane and Pecos Counties of Texas and the Ozona field in Crockett and Sutton Counties of Texas are core areas for Pioneer's Permian Division operations in terms of existing production, production and reserve growth, and identification of additional drilling locations. During 1996, the Permian Division expanded its growth strategy to include significant emphasis on exploration activities in order to produce a more balanced portfolio. In November 1996, Pioneer's predecessor, Parker & Parsley, announced a significant oil discovery in the War-Wink West Field in the Delaware Basin of West Texas. This Pioneer operated well, the University 18-34 #1, tested at rates of up to 720 barrels of oil per day and is currently producing at its expected allowable rate of approximately 270 barrels of oil per day and 374 thousand cubic feet of gas per day. Pioneer and Enserch Exploration, Inc. ("Enserch") each own a 50% working interest in this well, which is the first in their joint exploration and development of the 4,500 acre War-Wink prospect. In addition, during 1996, Parker & 129 139 Parsley experienced successful results from its exploratory efforts in the Permian reef play of the Southeastern Shelf of the Midland Basin. Pioneer will continue to focus on the development of the existing properties utilizing waterflood procedures and secondary recovery technologies as these efforts have consistently resulted in increased production, reserve additions due to development drilling, and new drilling locations. In addition, all of the fields in this operational group have been screened for feasibility for carbon dioxide (CO(2)) flood implementation, and Pioneer plans to move forward in utilizing this technology in 1997. During 1997, Pioneer plans to continue its development of the War-Wink prospect by drilling two confirmation wells and an additional two to four development wells. Pioneer and Enserch also control approximately 30,000 additional acres in the Delaware Basin play in Southeastern New Mexico and West Texas where they intend to drill eight exploratory wells in 1997. Also during 1997, Pioneer plans to perform additional 3-D seismic data interpretation in order to exploit the Midland Basin successes. In total, Pioneer anticipates spending $45 million in 1997 in this area to drill approximately 220 wells and to perform recompletions on approximately 90 targeted wells. Eighty percent of these planned expenditures are devoted to development activities. - MidContinent Division. The MidContinent Division includes properties located in the Hugoton Field in Kansas and other properties located in Oklahoma. Pioneer plans to engage in both acquisitions and divestitures of oil and gas properties in order to position this portfolio of properties for significant growth through development and exploratory drilling opportunities. During 1997, Pioneer plans to spend approximately $23 million in the MidContinent Division on exploitation and exploration activities. This activity includes drilling approximately 45 development wells and performing recompletions on approximately 20 targeted wells. The Hugoton field in southwest Kansas is one of the largest producing gas fields in the continental United States. Pioneer's Hugoton properties accounted for approximately 27% of its equivalent proved reserves and 26% of the present value of estimated future net cash flows determined as of December 31, 1996, in accordance with SEC guidelines. Pioneer's Hugoton properties represent approximately 13% of the proved reserves in the field and are located on over 230,000 net acres, covering approximately 400 square miles. Pioneer's properties are concentrated in the central fairway of the field and benefit from better reservoir characteristics, including thicker productive zones, higher porosity and higher permeability than properties on the edges of the field. Management believes that, as a result, Pioneer's Hugoton properties will have a longer productive life and higher natural gas recoveries than properties located near the edge of the Hugoton field. Pioneer has working interests in approximately 1,100 wells in the Hugoton field, 950 of which it operates, and royalty interests in approximately 800 wells. Pioneer owns substantially all of the gathering and processing facilities which service its production from the Hugoton field, which allows Pioneer to control the production, gathering, processing and sale of its gas and associated NGLs to various major intrastate and interstate pipelines through its direct interconnects. Pioneer's Hugoton properties are capable of producing approximately 200 MMcf of wet gas per day (i.e., gas production at the wellhead before processing and before reduction for royalties). Substantially all of Pioneer's Hugoton production is processed through its Satanta plant. See "-- Natural Gas Processing -- Satanta Natural Gas Processing Plant." Production in the Hugoton field is subject to allowables set by state regulators. Pioneer estimates that it and other major producers in the Hugoton field produced at or near capacity in 1996 and expects such practice to continue. From 1992 until August 1997, Pioneer's predecessor, Mesa, invested over $78 million in capital expenditures in its Hugoton properties to construct the Satanta Plant and related facilities, and to upgrade gathering and compression facilities, production equipment and pipeline interconnects, and Pioneer intends to continue to invest in such properties, in order to maintain production capacity and marketing flexibility. Additionally, Pioneer intends to submit an application to the Kansas Corporation Commission (the "KCC") to allow infill drilling into the Council Grove Formation. Pioneer believes that such infill drilling could increase production from its Hugoton properties. There can be no 130 140 assurance that the application will be approved or as to the timing of receipt of such approval if such approval is obtained. The KCC is the state regulatory agency that regulates oil and gas production in Kansas. The KCC is responsible for the determination of market demand (allowables) for the Hugoton field and the allocation of allowables among the more than 9,000 wells in the field. Twice each year, the KCC sets the field wide allowable production at a level estimated to be necessary to meet the Hugoton market demand for the summer and winter production periods. The field wide allowable is then allocated among individual wells determined by a series of calculations that are principally based on each well's pressure, deliverability and acreage. The allowables assigned to individual wells are affected by the relative production, testing, and drilling practices of all producers in the field, as well as the relative pressure and deliverability performance of each well. Generally, field wide allowables are influenced by overall gas market supply and demand in the United States as well as specific nominations for gas from the parties who produce or purchase gas from the field. Since 1987, field wide allowables have increased in each year except 1991. The total Hugoton field allowable in 1996 was 600 Bcf of wellhead gas. In 1994 the KCC issued an order establishing new field rules which modified the formulas used to allocate allowables among wells in the Chase formation portion of the Hugoton field. The standard pressure used in each well's calculated deliverability was reduced by 35%, greatly benefitting Pioneer's high deliverability wells. Also, the new rules assign a 30% greater allowable to 640 acre units with infill wells than to similar units without infill wells. Substantially all of Pioneer's Hugoton infill wells have been drilled. Pioneer's share of the allowables from the field increased from approximately 10% in late 1993 to approximately 14% after the new field rules were implemented in 1994. Pioneer's share of the field allowable averaged 13% in 1996. The net Hugoton field production of Pioneer's predecessor, Mesa, decreased to approximately 67 Bcfe in 1996 compared with 70 Bcfe in 1995 as a result of equipment maintenance in 1996. Pioneer expects its Hugoton field production will decline slightly from 1996 levels each year through 1998. Beginning in 1999, Pioneer expects annual production declines due to normal depletion. - West Panhandle Division. The West Panhandle properties are located in the Texas panhandle. Natural gas from these properties is produced from approximately 600 wells, all of which Pioneer operates, on over 185,000 net acres. All of Pioneer's West Panhandle production is processed through Pioneer's Fain natural gas processing plant. See "-- Natural Gas Processing -- Fain Natural Gas Processing Plant." Pioneer's West Panhandle reserves are owned and produced pursuant to contracts with CIG, the first of which was executed in 1928 by predecessors of both companies. An amendment to these contracts, the PAA, allocates 77% of the production from the West Panhandle field properties to Pioneer and 23% to CIG, effective as of January 1, 1991. Under the associated agreements, Pioneer operates the wells and production equipment and CIG owns and operates the gathering system by which Pioneer and CIG's production is delivered to the Fain plant. CIG also performs certain administrative functions. Each party reimburses the other for its respective share of certain costs and expenses incurred for the joint account. As of December 31, 1996, Pioneer's West Panhandle properties represented approximately 16% of Pioneer's equivalent proved reserves and approximately 14% of the present value of estimated future net cash flows, determined in accordance with SEC guidelines. Pioneer has identified over 100 locations that have additional production potential in new areas or deeper zones, of which Pioneer plans to redrill 58 in 1997 and the balance in 1998. Additionally, Pioneer has identified approximately 500 locations that have potential for infill drilling. Pioneer intends to apply to the Texas Railroad Commission for approval of such infill drilling, but there can be no assurance that Pioneer will be able to obtain such regulatory approval or as to the timing of receipt of such approval if such approval is obtained. 131 141 Pioneer's production of wellhead gas from the West Panhandle field is governed by the PAA and other contracts with CIG. Pioneer was contractually limited to take wellhead gas production up to a maximum of 32 Bcf in 1996, but actually took only 27 Bcf primarily due to a weather-related decrease in demand in 1996. Beginning in 1997 Pioneer is not subject to annual contractual production limitations and will have the right to take and market as much gas as it can produce, subject to specific CIG seasonal and daily entitlements as provided for under the contracts. Assuming continuation of existing economic and operating conditions, Pioneer expects production from its existing West Panhandle properties will be 37 Bcf of wellhead gas in 1997. The PAA contains provisions which allocate 77% of ultimate production after January 1, 1991 to Pioneer and 23% to CIG. As a result, Pioneer records 77% of total annual West Panhandle production as sales, regardless of whether Pioneer's actual deliveries are greater or less than the 77% share. The difference between Pioneer's 77% entitlement and the amount of production actually sold by Pioneer to its customers is recorded monthly as production revenue with corresponding accruals for operating costs, production taxes, depreciation, depletion and amortization, and gas balancing receivables. At December 31, 1996, Pioneer had cumulative production which was less than its 77% entitlement since January 1, 1991, and a long-term gas balancing receivable of $48 million was recorded in Pioneer's balance sheet in other assets. In future years, as Pioneer sells to customers more than its 77% entitlement share of field production, this receivable will be realized. - Houston Division. Pioneer's Houston Division properties are located in the Gulf of Mexico offshore Texas and Louisiana, and represent approximately 1% of Pioneer's equivalent proved reserves and approximately 2% of the present value of estimated future net cash flows as determined in accordance with SEC guidelines at December 31, 1996. From late 1994 until August 1997, Pioneer's predecessor, Mesa, directed a greater portion of its capital spending towards exploration and development in the Gulf of Mexico. During that time, Mesa successfully completed 21 out of 24 wells adding 63 Bcfe to proved reserves. As a result, Mesa's offshore production increased by approximately 50% on an Mcfe basis from 1994 to 1995, and by an additional 58% on an Mcfe basis from 1995 to 1996. Pioneer currently plans to drill up to seven exploratory wells on its existing properties in the remainder of 1997. Because Pioneer has existing production facilities offshore, it has been able to bring new wells on production quickly and at a lower cost than could be achieved otherwise. Pioneer currently owns interests in 56 blocks in the Gulf of Mexico, which cover an aggregate of approximately 141,000 net acres. Pioneer owns approximately 600 square miles of 3-D seismic data in and around its existing Gulf of Mexico properties. Pioneer plans to acquire an additional 100 square miles of 3-D seismic data covering these properties in 1997. After the procurement of additional 3-D seismic data, Pioneer will have 3-D seismic data covering approximately 90% of its existing Gulf of Mexico properties. Application of 3-D seismic technology to Pioneer's Gulf of Mexico acreage represents a significant future opportunity to increase reserves and cash flow through exploratory and development drilling. Pioneer currently anticipates spending approximately $53 million on identified development and exploration projects on its existing Gulf of Mexico properties during 1997. In 1996, Pioneer's predecessor, Mesa, purchased 11 blocks covering 57,340 gross (39,685 net) acres in the Gulf of Mexico. Mesa paid $1.7 million for its share of the 11 blocks, 6 of which are located in areas where Pioneer, as successor to Mesa, has producing interests. Pioneer, as successor to Mesa, was high bidder on four blocks covering 17,500 acres in the March 1997 federal lease sale in the Gulf of Mexico, and was subsequently awarded those blocks by the MMS for approximately $0.7 million. - Gulf Coast Division. The Gulf Coast Division includes onshore oil and gas properties located in South and East Texas, Louisiana, Mississippi and Alabama. The primary producing formations in this region include the Wilcox, Frio and Yegua formations in Texas and the Cretaceous formation in Mississippi. The addition of the domestic properties acquired as a part of the Bridge Oil Limited acquisition (primarily in South Texas and Louisiana), positioned Pioneer to be better able to pursue and realize future economic growth in this area. 132 142 The strategy for the Gulf Coast Division has been to emphasize the growth of natural gas reserves. To accomplish this, Pioneer has devoted the majority of its domestic exploration efforts to this region as well as its investment in and utilization of 3-D seismic technology. In addition, Pioneer is successfully employing newer drilling techniques such as drilling horizontal wells. Utilization of 3-D seismic technology during 1996 yielded substantial results in Pioneer's Lopeno field which produces from the Wilcox formation. Gross gas production increased from 14 MMcf per day to 38 MMcf per day in 1996 in this area as a result of drilling six development wells, most of which were identified through the 3-D project, and Pioneer has identified several additional drilling locations after interpreting 3-D seismic data. In addition, Pioneer experienced successful results in its Central Texas Pawnee field which produces from the Edwards formation after drilling a successful horizontal well in late 1996. This well, the S.E. Turner Gas Unit #2, in which Pioneer owns a 100% working interest, is currently flowing at a rate of 3.1 MMcf per day. Pioneer plans to drill two additional horizontal wells and to initiate a 3-D project in this field during 1997 in order to exploit the 1996 successes. Overall, Pioneer plans to continue its emphasis on exploration activities in the Gulf Coast Division with a total budget of $45 million being devoted to drilling approximately 25 exploratory wells and 40 development wells. - International. Pioneer owns interests in Argentina consisting of a 14.42% interest in the Confluencia block and a 15% interest in the China Muerta block, both in the Neuquen Basin of Central Argentina. During 1996, Pioneer's predecessor, Parker & Parsley, participated in several discoveries in the Confluencia Sur field in the Confluencia block. In early 1996, Parker & Parsley announced the successful completion of two exploratory wells (the Naco x-1 and the Sierra de Reyes x-1), and, in January 1997, Parker & Parsley announced the successful completion of three development wells, also in the Confluencia Sur field. The three wells, the Sierra de Reyes 2, 3 and 4, operated by Petrolera Argentina San Jorge S.A., collectively tested 3,727 barrels of oil per day, and current gross production for the field is at a facility-constrained rate of 2,520 Bbls of oil per day. Pioneer expects to drill an additional two to three development wells in the Confluencia Sur field during the first six months of 1997 in order to increase daily oil production. During May 1997, Pioneer finalized negotiations with Triton Energy for a 40% working interest in a joint exploration program of two blocks in Guatemala's South Peters Basin. Drilling on the Piedras Blancas #1 is expected to be completed by the end of the year at an estimated total cost to Pioneer of $3.7 million. - Other Properties. Pioneer's non-oil and gas tangible properties include buildings, leasehold improvements, and office equipment, primarily in Midland and Irving, Texas, and certain other assets. Non-oil and gas tangible properties represent less than 1% of the net book value of Pioneer's properties. Oil and Gas Mix Pioneer seeks to maintain a strategic balance between oil and natural gas reserves and production. While Pioneer's reserve and production mix may vary somewhat on a short-term basis as Pioneer takes advantage of market conditions and specific acquisition and development opportunities, management believes that a relative mix of approximately 50% oil and 50% natural gas is in the best long-term interests of Pioneer and its stockholders. Pioneer's reserve mix was 47% oil and 53% gas at December 31, 1996, and its production mix was 43% oil and 57% gas during 1996, in each case giving effect to the combination of Parker & Parsley and Mesa (including the Greenhill Acquisition). 133 143 Productive Wells The following table sets forth the number of productive oil and gas wells attributable to Pioneer's properties as of June 30, 1997 and December 31, 1996, 1995, 1994, 1993 and 1992, giving effect to the combination of Parker & Parsley and Mesa (including the Greenhill Acquisition with respect to the June 30, 1997 information).
COMBINED COMBINED GROSS PRODUCTIVE WELLS(A) NET PRODUCTIVE WELLS(A) ------------------------- ------------------------ OIL GAS TOTAL OIL GAS TOTAL ------ ------ ------- ------ ------ ------ Six months ended June 30, 1997: United States............................... 8,992 2,455 11,447 5,427 822 6,249 Argentina................................... 6 -- 6 1 -- 1 ----- ----- ------ ----- ----- ----- Total............................... 8,998 2,455 11,453 5,428 822 6,250 ===== ===== ====== ===== ===== ===== Year ended December 31, 1996: United States............................... 5,748 3,560 9,308 3,141 2,143 5,284 Argentina................................... 5 -- 5 1 -- 1 ----- ----- ------ ----- ----- ----- Total............................... 5,753 3,560 9,313 3,142 2,143 5,285 ===== ===== ====== ===== ===== ===== Year ended December 31, 1995: United States............................... 6,317 4,229 10,546 3,221 2,154 5,374 Australia and Other Foreign................. 112 450 562 27 54 81 ===== ===== ====== ===== ===== ===== Total............................... 6,429 4,679 11,108 3,248 2,208 5,455 ===== ===== ====== ===== ===== ===== Year ended December 31, 1994: United States............................... 8,284 5,310 13,594 4,450 3,123 7,574 Australia and Other Foreign................. 83 542 625 19 70 89 ----- ----- ------ ----- ----- ----- Total............................... 8,367 5,852 14,219 4,469 3,193 7,663 ===== ===== ====== ===== ===== ===== Year ended December 31, 1993: United States............................... 9,300 4,169 13,469 2,814 2,892 5,706 Australia and Other Foreign................. -- -- -- -- -- -- ----- ----- ------ ----- ----- ----- Total............................... 9,300 4,169 13,469 2,814 2,892 5,706 ===== ===== ====== ===== ===== ===== Year ended December 31, 1992: United States............................... 4,591 3,760 8,351 1,696 2,750 4,445 Australia and Other Foreign................. -- -- -- -- -- -- ----- ----- ------ ----- ----- ----- Total............................... 4,591 3,760 8,351 1,696 2,750 4,445 ===== ===== ====== ===== ===== =====
- --------------- (a) Productive wells consist of producing wells and wells capable of production, including shut-in wells. One or more completions in the same well bore are counted as one well. Any well in which one of the multiple completions is an oil completion is classified as an oil well. 134 144 Leasehold Acreage. The following table sets forth information about Pioneer's developed, undeveloped and royalty leasehold acreage as of December 31, 1996 giving effect to the combination of Parker & Parsley and Mesa (but not the Greenhill Acquisition).
COMBINED COMBINED DEVELOPED ACREAGE UNDEVELOPED ACREAGE COMBINED ------------------------ ------------------------ ROYALTY GROSS ACRES NET ACRES GROSS ACRES NET ACRES ACREAGE ----------- --------- ----------- --------- --------- Year ended December 31, 1996: United States: Onshore...................... 1,693,632 944,286 1,070,707 621,287 563,908 Offshore..................... 155,832 64,028 94,830 76,863 -- Argentina(a).................... 5,718 825 1,816,429 262,111 -- --------- --------- --------- --------- ------- Total................... 1,855,182 1,009,139 2,981,966 960,261 563,908 ========= ========= ========= ========= =======
- --------------- (a) Effective February 22, 1997, Pioneer relinquished its interests in the Laguna Blanca and Las Lajas blocks in the Neuquen Basin of Central Argentina which represents 1,199,670 gross and 173,113 net undeveloped acres included in the table at December 31, 1996. Drilling Activities. The information included under this heading "Drilling Activities" has been prepared by giving effect to the combination of Parker & Parsley and Mesa (including the Greenhill Acquisition with respect to the June 30, 1997 information). Pioneer seeks to increase its oil and gas reserves, production and cash flow by concentrating on drilling development wells and by conducting additional development activities such as recompletions. From the beginning of 1992 through June 30, 1997, Pioneer drilled 2,429 gross (1,644 net) wells, 96% of which were successfully completed as productive wells, at a total cost (net to Pioneer's interest) of $935.5 million. During 1996, Pioneer drilled 648 gross (435.5 net) wells for a total cost of approximately $251.6 million, 80% of which was spent on development wells and related facilities. Pioneer's current 1997 capital expenditure budget is $475 million which Pioneer has allocated as follows: $300 million to development drilling and production enhancement activities, $100 million to exploration activities and $75 million to oil and gas property acquisitions. Pioneer believes that its current property base, which has been significantly enhanced and expanded by the development of properties acquired in prior years, provides a substantial inventory of prospects for continued reserve, production and cash flow growth. Pioneer currently has a portfolio of over 3,000 drilling locations. Pioneer believes that its current portfolio of undeveloped prospects provides attractive development and exploration opportunities for at least the next three to five years. 135 145 The following table sets forth the number of gross and net productive and dry wells in which Pioneer had an interest that were drilled and completed during the six months ended June 30, 1997 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992. This information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to Pioneer of productive wells compared to the costs of dry wells.
COMBINED GROSS WELLS COMBINED NET WELLS ------------------------------------------------ ---------------------------------------------------- SIX MONTHS SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------- JUNE 30, --------------------------------------- 1997 1996(B) 1995 1994 1993 1992 1997 1996(B) 1995 1994 1993 1992 ---------- ------- ---- ---- ---- ---- ---------- ------- ----- ----- ----- ----- United States: Productive wells: Development........... 207 583 452 313 391 265 163.1 398.4 321.0 217.9 265.0 160.0 Exploratory........... 10 38 31 6 2 5 6.4 25.2 18.3 3.5 1.6 4.1 Dry holes: Development........... 1 7 7 3 2 3 1.0 4.4 2.1 2.7 1.0 3.0 Exploratory........... 21 10 20 3 1 2 15.4 6.0 8.7 1.6 1.0 1.3 --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- 239 638 510 325 396 275 185.9 434.0 350.1 225.7 268.6 168.4 --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- Australia: Productive wells: Development........... -- 2 6 1 -- -- -- .3 1.4 .2 -- -- Exploratory........... -- -- 1 2 -- -- -- -- .3 .5 -- -- Dry holes: Development........... -- 1 -- -- -- -- -- .2 -- -- -- -- Exploratory........... -- 1 9 3 -- -- -- .2 2.8 2.5 -- -- --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- -- 4 16 6 -- -- -- .7 4.5 3.2 -- -- --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- Argentina: Productive wells: Development........... 0 3 -- -- -- -- .0 .4 -- -- -- -- Exploratory........... 1 -- 1 -- -- -- .1 -- .1 -- -- -- Dry holes: Development........... 4 -- -- -- -- -- .6 -- -- -- -- -- Exploratory........... 1 3 7 -- -- -- .1 .4 1.0 -- -- -- --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- 6 6 8 -- -- -- .8 .8 1.1 -- -- -- --- --- --- --- --- --- ----- ----- ----- ----- ----- ----- Total............. 245 648 534 331 396 275 186.7 435.5 355.7 228.9 268.6 168.4 === === === === === === ===== ===== ===== ===== ===== ===== Success ratio(a).......... 89% 97% 92% 97% 99% 98% 91% 97% 96% 97% 99% 97%
- --------------- (a) Represents those wells that were successfully completed as productive wells. (b) The 1996 amounts include only three months of activity related to Pioneer's Australian properties. The remaining foreign drilling activities primarily relate to Pioneer's interests in Argentine oil and gas properties. The following table sets forth information about Pioneer's wells that were in progress at June 30, 1997 and December 31, 1996.
COMBINED COMBINED ------------------------ ------------------------ JUNE 30, 1997 DECEMBER 31, 1996 ------------------------ ------------------------ GROSS WELLS NET WELLS GROSS WELLS NET WELLS ----------- --------- ----------- --------- United States: Development.................................. 100 72.5 122 91.6 Exploratory.................................. 32 22.5 10 7.3 --- ---- --- ---- Total................................ 132 95.0 132 98.9 === ==== === ==== Argentina: Exploratory.................................. 1 .4 2 .3 === ==== === ====
136 146 Exploratory Activities Pioneer plans to allocate resources to increasing its exploration opportunities with a focus on generating a portfolio of short to medium term impact projects. Pioneer currently anticipates that approximately 25% of its 1997 capital budget will be spent on exploratory projects. The majority of the 1997 exploratory budget is allocated to domestic activities within the onshore Gulf Coast, east Texas and Permian Basin areas. Pioneer's international exploration efforts will primarily be devoted to Central and South America. Exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons than development drilling or enhanced recovery activities. See "Risk Factors -- Replacement of Reserves." Pioneer is currently involved in 3-D seismic projects in the Gulf Coast region, the Permian Basin, other domestic locations and in international locations. Natural Gas Processing Through its natural gas processing plants, Pioneer extracts raw NGLs and crude helium from the wellhead natural gas stream. The NGLs are then transported and fractionated into their constituent hydrocarbons such as ethane, propane, normal butane, isobutane, and natural gasolines. The NGLs and helium are then sold pursuant to contracts providing for market-based prices. Pioneer processes its natural gas production for the extraction of NGLs and helium to enhance the market value of the gas stream. In recent years, Pioneer's predecessor made substantial capital investments to enhance its natural gas processing and helium extraction capabilities in the Hugoton and West Panhandle fields. Pioneer owns and operates its processing facilities, which allows Pioneer to (i) capture the processing margin, as third-party processing agreements generally available in the industry result in retention of a significant portion of the processing margin by the contract processor, (ii) control the quality of the residue gas stream, permitting it to deliver gas directly to pipelines for sales to local distribution companies, marketing companies and end users, and (iii) realize value from premium products such as crude helium. Pioneer believes that the ability to control its production stream from the wellhead through its processing facilities to disposition at central delivery points enhances its marketing opportunities and competitive position in the industry. Satanta Natural Gas Processing Plant. The Satanta plant was built in 1993 and has the capacity to process 250 MMcf of natural gas per day, enabling Pioneer to extract NGLs from substantially all of the gas produced from its Hugoton field properties as well as third party producers' gas. The Satanta plant also has the ability to extract helium from the gas stream. In 1996 the Satanta plant averaged 193 MMcf per day of inlet gas and produced a daily average of 10.6 MBbls of NGLs, 706 Mcf of contained helium and 144 MMcf of residue natural gas. In November 1996, Pioneer's predecessor, Mesa, commenced a natural gas processing alliance with Anadarko Petroleum Corporation ("Anadarko") and Western Resources Midcontinent Market Center, which provides for Pioneer to process up to 55 MMcf per day of Anadarko's gas at Pioneer's Satanta plant. Such agreement filled excess capacity at the Satanta plant. Pioneer is also focusing its efforts on obtaining additional dedications of third party natural gas to the Satanta plant and, if successful, plans to expand the plant's processing capacity. Fain Natural Gas Processing Plant. The Fain plant, which was built in the 1960's and had its most recent substantial upgrade in 1993, currently has inlet capacity of 140 MMcf per day. In 1996 the Fain plant averaged 77 MMcf per day of inlet gas and produced a daily average of 8.2 MBbls of NGLs and condensate, 14 Mcf of contained helium and 59 MMcf of residue natural gas. In December 1996, Pioneer's predecessor, Mesa, entered into a natural gas processing agreement with CIG and MAPCO, which provides for Pioneer to initially process approximately 8.5 Bcf of natural gas per year of third party gas at the Fain Plant. The agreement has a primary term through December 2009. Effective January 1, 1997, Mesa purchased from MAPCO and its affiliates all of their liquids attributable to the processing agreement above as well as rights to condensate from CIG's gathering system. It is expected that this purchase will increase Pioneer's condensate and NGL production by approximately 850 MBbls in 1997. 137 147 Such arrangements have filled excess capacity at the Fain plant. Pioneer plans to install a nitrogen rejection unit at the Fain plant in early 1998 to improve the quality of the residue natural gas stream and increase NGL and helium recoveries. Marketing of Production The information included under this heading "Marketing of Production" has been prepared by combining the results of operations of Parker & Parsley and Mesa (including the Greenhill Acquisition). General. Production from Pioneer's properties is marketed consistent with industry practices, which include the sale of oil at the wellhead to third parties, the sale of gas to third parties and, with respect to gas processing, the sale of dry (or residue) natural gas, helium, condensate and NGLs to third parties. Sales prices for oil and gas production and gas processing are negotiated based on factors normally considered in the industry such as the spot price for gas or the posted price for oil, price regulations, distance from the well to the pipeline, well pressure, estimated reserves, quality of gas and prevailing supply conditions. Due to a number of market forces, including the seasonal demand for natural gas, both sales volumes from Pioneers's properties and sales prices received vary on a seasonal basis. Sales volumes and price realizations for natural gas are generally higher during the first and fourth quarters of each calendar year. Gas Marketing. Effective January 1, 1996, Pioneer's predecessor, Parker & Parsley, along with Apache Corporation and Oryx Energy Company, formed Producers Energy Marketing, LLC ("ProEnergy"), a natural gas marketing company organized to create a direct link between gas producers and purchasers. The venture is structured to flow through the benefits arising out of the expanded services and the economies of scale from the aggregation of substantial volumes of gas. For a period of five years, Pioneer, as successor to Parker & Parsley, is obligated to sell to ProEnergy all gas production (subject to certain exclusions relative to immaterial volumes) that is owned or controlled by Pioneer, or any affiliate, in North America (onshore and offshore), which is not subject to a binding and enforceable gas sales contract in effect on July 1, 1996. On August 29, 1997, Pioneer announced its plan to withdraw as a member of ProEnergy effective January 1, 1998, as a result of the merger between Parker & Parsley and Mesa. After January 1, 1998, Pioneer plans to market its own equity gas. West Panhandle Gas Sales Contracts. Most of Pioneer's West Panhandle field residue natural gas is sold pursuant to gas purchase contracts with two major customers in the Texas Panhandle area. Approximately 9 Bcf per year of residue natural gas is sold to a gas utility that serves residential and commercial customers in Amarillo, Texas, under the terms of a long-term agreement dated January 2, 1993, which supersedes the original contract that had been in effect since 1949. The agreement contains a pricing formula for the five year period from 1993 through 1997 whereby 70% of the volumes sold to the gas utility are sold at fixed prices and the other 30% of volumes sold are priced at a regional market index based on spot prices plus $0.10 per Mcf. The fixed portion of the price formula was $2.85 per Mcf in 1994, $2.99 per Mcf in 1995, $3.21 per Mcf in 1996 and escalates to $3.45 per Mcf in 1997. Prices for 1998 and beyond will be determined by renegotiation. Pioneer provides the gas utility with peaking service, granting it the right to take, on a daily basis, residue gas attributable to 100 Mmcf per day of Pioneer's production under the PAA. The average price received by Pioneer for natural gas sales to the gas utility in 1996 was $2.94 per Mcf. Effective January 1, 1996, Pioneer's predecessor, Mesa, entered into a four-year contract with a marketing company which serves the local electric power generation facility and various other markets within and outside Amarillo, Texas. The contract provides for the sale of Pioneer's West Panhandle field gas which is in excess of the volumes sold to the gas utility and other existing industrial customers. The price for gas sold under this contract is a regional market index determined monthly based on spot prices plus $0.02 per MMBtu. In 1996, Mesa sold approximately 8 Bcf of residue natural gas to the marketing company for an average of $1.95 per Mcf. Prior to 1993, the right of Pioneer's predecessor, Mesa, to sell natural gas produced from the West Panhandle field was based, in part, upon contractual requirements to serve customers in Amarillo, Texas, and its environs. An amendment to the PAA in 1993 removed this restriction, and Pioneer now has the right to 138 148 market its production elsewhere. Pioneer believes that the right to market production outside the Amarillo area will ensure that Pioneer receives competitive terms for its West Panhandle field production. Through 1999, Pioneer's West Panhandle field production is under contract to customers as described above. NGL and Helium Sales. NGL production from both the Satanta and Fain plants are sold by component pursuant to a contractual arrangement with MAPCO, a major transporter and marketer of NGLs, through 2008 at the greater of MidContinent or Gulf of Mexico prices at the time of sale. Crude helium is sold to an industrial gas company under a long-term agreement that provides for annual price adjustments based on market prices. Significant Purchasers. Pioneer's two primary purchasers of crude oil are Mobil Oil Corporation ("Mobil") and Genesis Crude Oil, L.P. ("Genesis"), both of which purchase oil pursuant to contracts that provide for prices that are based on prevailing market prices. Approximately 13% and 10% of Pioneer's 1996 oil and gas revenues, were attributable to sales to Mobil and Genesis, respectively. During 1996, Pioneer's primary purchasers of natural gas, including natural gas liquids, were MAPCO and Western Resources, Inc, which accounted for 12% and 11%, respectively, of oil and gas revenues. Pioneer is of the opinion that the loss of any one purchaser would not have an adverse effect on its ability to sell its oil and gas production or natural gas products. Hedging Activities. Pioneer periodically enters into commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities Pioneer produces and sells, (ii) support Pioneer's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Combining the results of operations of Parker & Parsley and Mesa, during the six months ended June 30, 1997, hedging activities had no impact on the average price oil and gas prices received and increased the average price received for natural gas liquids by 1% and during 1996, Pioneer's hedging activities reduced the average price received for oil and gas sales 5% and 3%, respectively, as discussed below. Natural Gas. Pioneer employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The average gas prices per Mcf that Pioneer reports includes the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. During the six months ended June 30, 1997, Pioneer reported and realized an average gas price of $2.79 per Mcf. Pioneer reported an average gas price of $2.25 per Mcf for the year ended December 31, 1996. Pioneer's average realized price for physical gas sales (excluding hedge results) for the same period and on the same basis was $2.32 per Mcf. The comparable average NYMEX prompt month closing for the six months ended June 30, 1997 and the year ended December 31, 1996 was $2.25 per Mcf and $2.50 per Mcf, respectively. Crude Oil. All material purchase contracts governing Pioneer's oil production are tied directly or indirectly to NYMEX prices. The average oil prices per Bbl that Pioneer reports includes the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. During the six months ended June 30, 1997, Pioneer reported and realized an average oil price of $21.01 per Bbl. Pioneer reported an average oil price of $20.19 per Bbl for the year ended December 31, 1996. Pioneer's average realized price for physical oil sales (excluding hedge results) for the same period and on the same basis was $21.24 per Bbl. The comparable average NYMEX prompt month closing for the six months ended June 30, 1997 and the year ended December 31, 1996 was $21.36 per Bbl and $22.03 per Bbl, respectively. NGL. During the six months ended June 30, 1997 Pioneer received approximately $400 thousand (or $0.13 per Bbl) relating to its natural gas liquids hedging activities. 139 149 Future Production. At June 30, 1997, Pioneer had future production hedged as follows:
% OF PRODUCTION PRICE PRODUCT YEAR HEDGED UNIT RANGE ------- ---- ---------- ---- ------------- Natural gas........................................... 1997 44% Mcf $ 2.09-$2.21 1998 11% Mcf $ 2.37-$2.40 1999 1% Mcf $ 1.86 Crude Oil............................................. 1997 30% Bbl $18.76-$18.85 1998 6% Bbl $ 18.70 Natural gas liquids................................... 1997 10% Bbl $ 17.13
Production, Price and Cost Data The table below sets forth combined production, price and cost data with respect to Pioneer's properties for the six months ended June 30, 1997 and years ended December 31, 1996, 1995, 1994, 1993 and 1992 giving effect to the combination of Parker & Parsley and Mesa (including the Greenhill Acquisition for the periods ended June 30, 1997 and December 31, 1996).
COMBINED SIX MONTHS ENDED COMBINED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------- -------- -------- -------- -------- -------- UNITED STATES: Production information: Annual production: Oil (MBbls)............................................ 7,747 14,311 12,523 11,814 8,287 5,716 Gas (MMcf)............................................. 77,342 164,149 154,201 157,594 120,619 114,163 NGL (MBbls)............................................ 3,236 6,460 6,571 6,911 5,050 4,840 Total (MBOE)....................................... 23,873 48,129 44,794 44,991 33,440 29,583 Average daily production: Oil (Bbls)............................................. 42,801 39,101 34,310 32,367 22,704 15,617 Gas (Mcf).............................................. 427,304 448,495 422,468 431,764 330,463 311,921 NGL (Bbls)............................................. 17,878 17,650 18,003 18,934 13,836 13,224 -------- ------- ------- ------- -------- ------- Total (BOE)........................................ 131,896 131,500 122,724 123,262 91,617 80,828 Average prices: Oil (per Bbl).......................................... $ 19.20 $ 20.20 $ 16.67 $ 15.22 $ 16.41 $ 18.81 Gas (per Mcf).......................................... $ 2.37 $ 2.29 $ 1.79 $ 1.82 $ 1.90 $ 1.79 NGL (Bbls)............................................. $ 15.59 $ 15.10 $ 11.46 $ 10.53 $ 12.16 $ 12.33 Revenue (per BOE)...................................... $ 16.03 $ 15.84 $ 12.52 $ 12.00 $ 12.77 $ 12.54 Average costs: Production costs (per BOE): Lease operating expense.............................. $ 3.46 $ 3.26 $ 3.40 $ 3.53 $ 3.62 $ 3.14 Production taxes..................................... .74 .74 .53 .57 .60 .54 Workover............................................. .20 .15 .14 .14 .12 .10 -------- ------- ------- ------- -------- ------- Total.............................................. $ 4.40 $ 4.15 $ 4.07 $ 4.24 $ 4.34 $ 3.78 Depletion expense (per BOE)............................ $ 4.79 $ 4.70 $ 4.64 $ 4.70 $ 4.86 $ 5.05
140 150
COMBINED SIX MONTHS ENDED COMBINED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------- -------- -------- -------- -------- -------- AUSTRALIA AND ARGENTINA:(a) Production information: Annual production: Oil (MBbls)............................................ 74 403 1,574 880 -- -- Gas (MMcf)............................................. -- 1,927 8,626 4,634 -- -- NGL (MBbls)............................................ -- -- -- -- -- -- Total (MBOE)....................................... 74 724 3,012 1,652 -- -- Average daily production: Oil (Bbls)............................................. 409 1,101 4,312 2,411 -- -- Gas (Mcf).............................................. -- 5,265 23,633 12,696 -- -- NGL (Bbls)............................................. -- -- -- -- -- -- Total (BOE)........................................ 409 1,979 8,251 4,527 -- -- Average prices: Oil (per Bbl).......................................... $ 20.76 $ 19.81 $ 18.78 $ 17.12 $ -- $ -- Gas (per Mcf).......................................... $ -- $ 1.95 $ 1.88 $ 1.89 $ -- $ -- NGL (Bbls)............................................. $ -- $ -- $ -- $ -- $ -- $ -- Revenue (per BOE)...................................... $ 20.76 $ 16.21 $ 15.21 $ 14.43 $ -- $ -- Average costs: Production costs (per BOE): Lease operating expense................................ $ 5.96 $ 4.75 $ 4.12 $ 3.89 $ -- $ -- Production taxes....................................... .23 -- -- -- -- -- Workover............................................... -- -- -- -- -- -- -------- ------- ------- ------- -------- ------- Total.............................................. $ 6.19 $ 4.75 $ 4.12 $ 3.89 $ -- $ -- Depletion expense (per BOE)............................ $ 9.59 $ 5.73 $ 6.74 $ 6.77 $ -- $ -- TOTAL: Production information: Annual production: Oil (MBbls)............................................ 7,821 14,714 14,097 12,694 8,287 5,716 Gas (MMcf)............................................. 77,342 166,076 162,827 162,228 120,619 114,163 NGL (MBbls)............................................ 3,236 6,460 6,571 6,911 5,050 4,840 Total (MBOE)....................................... 23,947 48,853 47,806 46,643 33,440 29,583 Average daily production: Oil (Bbls)............................................. 43,210 40,202 38,622 34,778 22,704 15,617 Gas (Mcf).............................................. 427,304 453,760 446,101 444,460 330,463 311,921 NGL (Bbls)............................................. 17,878 17,650 18,003 18,934 13,836 13,224 Total (BOE)........................................ 132,305 133,479 130,975 127,789 91,617 80,828 Average prices: Oil (per Bbl).......................................... $ 19.21 $ 20.19 $ 16.91 $ 15.35 $ 16.41 $ 18.81 Gas (per Mcf).......................................... $ 2.37 $ 2.29 $ 1.80 $ 1.83 $ 1.90 $ 1.79 NGL (Bbls)............................................. $ 15.59 $ 15.10 $ 11.46 $ 10.53 $ 12.16 $ 12.33 Revenue (per BOE)...................................... $ 16.04 $ 15.85 $ 12.69 $ 12.09 $ 12.77 $ 12.54 Average costs: Production costs (per BOE): Lease operating expense.............................. $ 3.47 $ 3.28 $ 3.44 $ 3.54 $ 3.62 $ 3.14 Production taxes..................................... .73 .73 .49 .55 .60 .54 Workover............................................. .20 .15 .13 .13 .12 .10 -------- ------- ------- ------- -------- ------- Total.............................................. $ 4.40 $ 4.16 $ 4.06 $ 4.22 $ 4.34 $ 3.78 Depletion expense (per BOE)............................ $ 4.81 $ 4.72 $ 4.78 $ 4.77 $ 4.86 $ 5.05
- --------------- (a) Represents production associated with Pioneer's Australian subsidiaries prior to their divestiture in 1996. Competition and Markets Competition. The oil and gas industry is highly competitive. A large number of companies and individuals engage in the exploration for and development of oil and gas properties, and there is a high degree of competition for oil and gas properties suitable for development or exploration. Acquisitions of oil and gas properties have been an important element of Pioneer's growth, and Pioneer intends to continue to acquire oil and gas properties. The principal competitive factors in the acquisition of oil and gas properties include the staff and data necessary to identify, investigate and purchase such properties and the financial resources necessary to acquire and develop them. Many of Pioneer's competitors are substantially larger and have greater financial and other resources than Pioneer. Markets. Pioneer's ability to produce and market oil and gas profitably depends on numerous factors beyond Pioneer's control. The effect of these factors cannot be accurately predicted or anticipated. In recent years, worldwide oil production capacity and gas production capacity in certain areas of the United States have 141 151 exceeded demand, with resulting declines in the price of oil and gas. Although Pioneer cannot predict the occurrence of events that may affect oil and gas prices or the degree to which oil and gas prices will be affected, it is possible that prices for any oil or gas Pioneer produces will be lower than those currently available. Any significant decline in the price of oil or gas would adversely affect Pioneer's revenues, profitability and cash flow and could, under certain circumstances, result in a reduction in the carrying value of Pioneer's oil and gas properties. GOVERNMENTAL REGULATION Oil and gas exploration and production are subject to various types of regulation by local, state and federal agencies. Pioneer's operations are also subject to state conservation laws and regulations, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation of spacing, plugging and abandonment of wells. Each state generally imposes a production or severance tax with respect to production and sale of oil and gas within their respective jurisdictions. The regulatory burden on the oil and gas industry increases Pioneer's cost of doing business and, consequently, affects its profitability. The Outer Continental Shelf Lands Act (the "OCSLA") requires that all pipelines operating on or across the Outer Continental Shelf (the "OCS") provide open-access, nondiscriminatory service. Although the Federal Energy Regulatory Commission ("FERC") has chosen not to impose the regulations of Order No. 509, which implements the OCSLA, on gatherers and other nonjurisdictional entities, FERC has retained the authority to exercise jurisdiction over those entities if necessary to permit nondiscriminatory access to service on the OCS. In addition, gathering lines are currently exempt from FERC's jurisdiction, regardless of whether they are on the OCS, but FERC could eliminate this exception. Commencing May 1994, FERC issued a series of orders in individual cases that delineate its current gathering policy. FERC's gathering policy was retained and clarified with regard to deep water offshore facilities in a statement of policy issued in February 1996. FERC's new gathering policy does not address its jurisdiction over pipelines operating on or across the OCS pursuant to the OCSLA. If FERC were to apply Order No. 509 to gatherers on the OCS, eliminate the exemption of gathering lines and redefine its jurisdiction over gathering lines, these acts could result in a reduction in available pipeline space for existing shippers in the Gulf of Mexico and elsewhere, such as Pioneer. The United States Minerals Management Service (the "MMS") is conducting an inquiry into certain natural gas contract settlement agreements from which producers, such as Pioneer, on federal oil and gas leases have received settlement proceeds that the MMS claims are royalty-bearing and into the extent to which producers, such as Pioneer, have paid appropriate royalty on those proceeds. Because of the complex nature of the calculations necessary to determine potential royalty liability, it is impossible to predict, what, if any, additional or different royalty obligation may be asserted or ultimately recoverable with respect to any of Pioneer's prior natural gas contract settlement agreements. Additional proposals and proceedings that might affect the oil and gas industry are considered from time to time by Congress, FERC, state regulatory bodies and the courts. Pioneer cannot predict when or if any such proposals might become effective or their effect, if any, on Pioneer's operations. ENVIRONMENTAL AND HEALTH CONTROLS Pioneer's operations are subject to numerous federal, state and local laws and regulations relating to environmental and health protection. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the type, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas and impose substantial liabilities for pollution resulting from oil and gas operations. These laws and regulations may also restrict air or other discharges resulting from the operation of natural gas processing plants, pipeline systems and other facilities that Pioneer owns. Although Pioneer believes that compliance with environmental laws and regulations will not have a material adverse effect on operations or earnings, risks of substantial costs and 142 152 liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities, including potential criminal penalties, will not be incurred. Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from Pioneer's operations, could result in substantial costs and liabilities. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances released at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. Pioneer generates wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The U.S. Environmental Protection Agency and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes. Furthermore, certain wastes generated by Pioneer's oil and natural gas operations that are currently exempt from treatment as "hazardous wastes" may in the future be designated as "hazardous wastes," and therefore be subject to more rigorous and costly operating and disposal requirements. Pioneer currently owns or leases, and has in the past owned or leased, properties that for many years have been used for the exploration and production of oil and gas. Although Pioneer has used operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties owned or leased by Pioneer or on or under other locations where such wastes have been taken for disposal. In addition, some of these properties have been operated by third parties whose treatment and disposal or release of hydrocarbons or other wastes was not under Pioneer's control. These properties and the wastes disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, Pioneer could be required to remove or remediate previously disposed wastes or property contamination or to perform remedial plugging operations to prevent future contamination. For instance, until the past few years, it has been customary within the oil industry to dispose of tank bottoms in close proximity to the crude oil storage tanks in which they are accumulated. However, at least two separate federal courts have recently ruled that the sludges that accumulate at the bottom of crude oil storage tanks (commonly called "tank bottoms") may be classified as hazardous substances subject to regulation and liability under CERCLA. Consequently, wastes subject to classification as hazardous substances may have been disposed of or released on or under Pioneer's properties or on or under other properties in connection with the operation of Pioneer's properties. Federal regulations require certain owners or operators of facilities that store or otherwise handle oil, such as Pioneer, to prepare and implement spill prevention control plans, countermeasure plans, and facility response plans relating to the possible discharge of oil into surface waters. The Oil Pollution Prevention Act of 1990 ("OPA") amends certain provisions of the federal Water Pollution Control Act of 1972, commonly referred to as the Clean Water Act ("CWA") and other statutes as they pertain to the prevention of and response to oil spills into navigable waters. The OPA subjects owners of facilities to strict joint and several liability for all containment and cleanup costs and certain other damages arising from a spill, including, but not limited to, the costs of responding to a release of oil to surface waters. The CWA provides penalties for any discharges of petroleum products in reportable quantities and imposes substantial liability for the costs of removing a spill. State laws for the control of water pollution also provide varying civil and criminal penalties and liabilities in the case of releases of petroleum or its derivatives into surface waters or into the ground. OPA requires responsible parties to establish and maintain evidence of financial responsibility to cover removal costs and damages resulting from an oil spill. OPA calls for a financial responsibility increase from $35 million to $150 million to cover pollution cleanup for offshore facilities. In August 1993, MMS, which has 143 153 been charged with implementing certain segments of OPA, issued its advanced notice of proposed rulemaking that would increase financial responsibility requirements for offshore lessees and permittees to $150 million as required by OPA. Due to the OPA's broad definition of "offshore facility," Pioneer could become subject to the financial responsibility rule if it is proposed and adopted; to date, however, the MMS has not formally proposed the financial responsibility regulations. On May 9, 1995, the U.S. House of Representatives passed a bill that would lower the financial responsibility requirements applicable to offshore facilities to $35 million (the current requirement under the federal Outer Continental Shelf Lands Act). The bill allows the limit to be increased to $150 million if a formal risk assessment indicates the increase to be warranted. It would also define "offshore facility" to include only coastal oil and gas properties. A U.S. Senate bill that would also lower the financial responsibility requirements for offshore facilities was passed in late 1995. The Senate bill would reduce the scope of "offshore facilities" subject to this financial assurance requirement to those facilities seaward of the U.S. coastline that are engaged in drilling for, producing or processing oil or that have the capacity to transport, store, transfer, or handle more than 1,000 barrels of oil at a time. Currently, the House and Senate bills are being reconciled in Conference Committee. The Clinton Administration has indicated support for these changes to the OPA financial responsibility requirements. Pioneer cannot predict the final form of the financial responsibility requirements that will be ultimately established, but any role that requires Pioneer to establish evidence of financial responsibility in the amount of $150 million has the potential to have a material adverse effect on Company operations and earnings. Pioneer does not believe that the rule to be proposed by the MMS will be any more burdensome to it than it will be to other similarly situated oil and gas companies. Under current federal regulations concerning offshore operations, the MMS is authorized to require lessees to post supplemental bonds to cover their potential leasehold abandonment costs. By letter dated November 9, 1995, Pioneer's predecessor was advised by the MMS that it does not qualify for a waiver from supplemental bond requirements and that Pioneer may be required to post supplemental bonds covering its potential obligations with respect to offshore operations. Pioneer's predecessor executed a guaranty of abandonment liability (area wide) with the MMS on April 26, 1996, in satisfaction of these obligations. In 1993 a number of companies in New Mexico, including Pioneer's predecessor, were named in a preliminary information request from the Environmental Protection Agency (the "EPA") as persons who may be potentially responsible for costs incurred in connection with the Lee Acres Landfill site. Although Pioneer did not directly dispose of any materials at the site, it may have contracted to transport materials from its operations with certain trucking companies also named in the information request. To the extent any materials produced by Pioneer may have been transported to the site, Pioneer believes that such materials were rainwater and/or water produced from natural gas wells, which Pioneer believes are exempt or excluded from the definitions of "hazardous waste" or "hazardous substance" under applicable Federal environmental laws, although the EPA may assert a contrary position. Since submitting its response to the information request in April 1994, Pioneer has not received any additional inquiries or information from the EPA concerning the site, including whether Pioneer is, in fact, asserted to be a responsible party for the site or what potential liability, if any, Pioneer may face in connection with this matter. Many states in which Pioneer operates have recently begun to regulate naturally occurring radioactive materials ("NORM") and NORM wastes that are generated in connection with oil and gas exploration and production activities. NORM wastes typically consist of very low-level radioactive substances that become concentrated in pipe scale and in production equipment. State regulations may require the testing of pipes and production equipment for the presence of NORM, the licensing of NORM-contaminated facilities and the careful handling and disposal of NORM wastes. Pioneer believes that the growing regulation of NORM will have a minimal effect on Pioneer's operations because Pioneer generates only a very small quantity of NORM on an annual basis. Pioneer does not believe that its environmental risks are materially different from those of comparable companies in the oil and gas industry. Nevertheless, no assurance can be given that environmental laws will not, in the future, result in a curtailment of production or processing or a material increase in the costs of production, development, exploration or processing or otherwise adversely affect Pioneer's operations and financial condition. 144 154 Pioneer employs an environmental specialist charged with monitoring regulatory compliance. Historically, Pioneer has performed an environmental review as part of the due diligence work on potential acquisitions, including acquisitions of oil and gas properties. Pioneer is not aware of any material environmental legal proceedings pending against it or any significant environmental liabilities to which it may be subject. EMPLOYEES At August 31, 1997, Pioneer had 1,104 employees. LITIGATION Pioneer is a party to various legal proceedings incidental to its business, including, but not limited to, the proceedings described below, involving claims in oil and gas leases or interests, other claims for damages in amounts not in excess of 10% of its current assets and other matters, none of which Pioneer believes to be material. Masterson. In February 1992 the current lessors of an oil and gas lease (the "Gas Lease") dated April 30, 1955, between R. B. Masterson, et al., as lessor, and CIG, as lessee, sued CIG in Federal District Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under the Gas Lease. Under the agreements with CIG, Pioneer, as successor to Mesa, has an entitlement to gas produced from the Gas Lease. In August 1992 CIG filed a third-party complaint against Pioneer for any such royalty underpayments which may be allocable to Pioneer. The plaintiffs alleged that the underpayment was the result of CIG's use of an improper gas sales price upon which to calculate royalties and that the proper price should have been determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment to the Gas Lease (the "Gas Lease Amendment"). The plaintiffs also sought a declaration by the court as to the proper price to be used for calculating future royalties. The plaintiffs alleged royalty underpayments of approximately $500 million (including interest at 10%) covering the period from July 1, 1967, to the present. In March 1995 the court made certain pretrial rulings that eliminated approximately $400 million of the plaintiffs' claims (which related to periods prior to October 1, 1989), but which also reduced a number of Pioneer's defenses. Pioneer and CIG filed stipulations with the court whereby Pioneer would have been liable for between 50% and 60%, depending on the time period covered, of an adverse judgment against CIG for post-February 1988 underpayments of royalties. On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned its verdict. Among its findings, the jury determined that CIG had underpaid royalties for the period after September 30, 1989, in the amount of approximately $140,000. Although the plaintiffs argued that the "favored-nations" clause entitled them to be paid for all of their gas at the highest price voluntarily paid by CIG to any other lessor, the jury determined that the plaintiffs were estopped from claiming that the "favored-nations" clause provides for other than a pricing-scheme to pricing-scheme comparison. In light of this determination, and the plaintiffs' stipulation that a pricing-scheme to pricing-scheme comparison would not result in any "trigger prices" or damages, the defendants asked the court for a judgment that the plaintiffs take nothing. The court, on June 7, 1995, entered final judgment that the plaintiffs recover no monetary damages. The plaintiffs have filed a motion for new trial on which the court has not yet ruled. Pioneer cannot predict whether the court will grant such motion or, if it does not, whether the plaintiffs will appeal the court's final judgment. On June 7, 1996, the plaintiffs filed a separate suit against CIG and Pioneer in state court in Amarillo, Texas, similarly claiming underpayment of royalties under the "favored-nations" clause, but based upon the above-described pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The plaintiffs also claim underpayment of royalties since June 7, 1995 under the "favored-nations" clause based upon either the pricing-scheme to pricing-scheme method or their previously alleged higher price method. Pioneer believes it has several defenses to this action and intends to contest it vigorously. Pioneer has not yet determined the amount of damages, if any, that would be payable if such action were determined adversely to Pioneer. The federal court in the above-referenced first suit issued an order on July 29, 1996 which stayed the state suit pending a decision by the court on the plaintiff's motion for new trial. 145 155 Based on the jury verdict and final judgment, Pioneer does not expect the ultimate resolution of either of these lawsuits to have a material adverse effect on its financial position or results of operations. Shareholder Litigation. On July 3, 1995, Robert Strougo filed a class action and derivative action in the District Court of Dallas County, Texas, 160th Judicial District, against T. Boone Pickens, Paul W. Cain, John L. Cox, John S. Herrington, Wales H. Madden, Jr., Fayez S. Sarofim, Robert L. Stillwell, and J. R. Walsh, Jr., each of whom is a present or former director of Pioneer or its predecessor. The class action is purportedly brought on behalf of a class of Pioneer shareholders and alleges, inter alia, that the Board of Directors of Pioneer (the "Board") infringed upon the suffrage rights of the class and impaired the ability of the class to receive tender offers by adoptions of the shareholder rights plan. The lawsuit is also brought derivatively on behalf of Pioneer and alleges, inter alia, that the Board breached fiduciary duties to Pioneer by adopting the shareholder rights plan and by failing to consider the sale of Pioneer. The lawsuit seeks unspecified damages, attorneys' fees, and injunctive and other relief. Two other lawsuits filed by Herman Krangel, Lilian Krangel, Jacquelyn A. Cady, and William A. Montagne, Jr., in the District Court of Dallas County have been consolidated into this lawsuit. A third lawsuit filed by Deborah M. Eigen and Adele Brody as a derivative lawsuit in the U.S. District Court for the Northern District of Texas, Dallas Division, intervened in this lawsuit. On February 5, 1996, the Court denied Defendants' Motion to Dismiss. A trial date has been set for September 15, 1997. The case has been stayed pending a Special Litigation Committee investigation by Pioneer to decide whether the case should be dismissed. Kansas Ad Valorem Tax. The Natural Gas Policy Act of 1978 allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on the FERC ruling that the Kansas ad valorem tax was such a tax, Mesa collected the Kansas ad valorem tax in addition to the otherwise maximum lawful price. FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia, which held in June 1988 that FERC failed to provide a reasoned basis for its findings and remanded the case to FERC for further consideration. On December 1, 1993, the FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. The FERC clarified the effective date of its decision by an order dated May 18, 1994. The order clarified that the effective date applies to tax bills rendered after June 28, 1988, not sales made on or after that date. Numerous parties filed appeals of the FERC's action in the D.C. Circuit. Various natural gas producers challenged the FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in any event, have been applied prospectively. Other parties challenged the FERC's orders on the grounds that the FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996, which holds that producers must make refunds of all Kansas ad valorem taxes collected with respect to production since October 4, 1983 as opposed to June 28, 1988. Petitions for rehearing were denied November 6, 1996. Various natural gas producers subsequently filed a petition for writ of certiori with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by the FERC). Williams Natural Gas Company filed a cross-petition for certiori seeking to impose refund liability back to December 1, 1978. Both petitions were denied on May 12, 1997. Mesa filed a petition for adjustment with the FERC on June 24, 1997. Mesa is unable at this time to predict the final outcome of this matter or the amount, if any, that will ultimately be refunded. No provision for liability has been made to the accompanying financial statements. Mesa is seeking waiver or set-off with respect to that portion of the refund associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the higher prices collected, and (iii) interest for all periods. TRANSFER AGENT The transfer agent and registrar for the Pioneer Common Stock is Continental Stock Transfer & Trust Company. 146 156 BUSINESS OF CHAUVCO GENERAL Chauvco was incorporated under the laws of the Province of Alberta on January 16, 1981 and continued under the ABCA on November 20, 1984. Chauvco is registered to carry on business in the provinces of Alberta, Saskatchewan, British Columbia and Manitoba in Canada. Chauvco also carries on business in Argentina in the provinces of Tierra del Fuego, Neuquen, Rio Negro, and Santa Cruz. During 1996, Chauvco began development operations in Gabon, in central west Africa. Chauvco has historically grown both through its own exploration and development activities and through acquisitions. Chauvco has and will continue to examine and, if considered desirable, pursue available acquisition, exploration or development opportunities in Canada and elsewhere in the world. Chauvco's principal executive offices are located at 2900, 255 - 5th Avenue S.W., Calgary, Alberta, Canada T2P 3G6 and its telephone number is (403) 231-3100. Chauvco's activities are concentrated on the acquisition, exploration, development and production of petroleum and natural gas reserves in Canada in the provinces of Alberta and British Columbia and in Argentina in the provinces of Tierra del Fuego and Neuquen. In 1996, Chauvco began development operations in Gabon in central west Africa. Until 1992, all of Chauvco's petroleum and natural gas reserves and related production revenues were based in Canada. Chauvco maintains a reserve base and an inventory of undeveloped petroleum and natural gas rights throughout western Canada. Chauvco's primary focus has been on internally generating oil and gas prospects in the western Canadian sedimentary basin which provide satisfactory rates of return. In such prospects, Chauvco strives to obtain operatorship and maintain a high working interest ownership position. In December, 1996 Chauvco added to its Canadian reserve base by successfully negotiating the acquisition of Tidal Resources Inc. ("Tidal"). The transaction, which closed on January 3, 1997, added production of 10 million cubic feet per day of natural gas and 1,500 barrels per day of oil. The C$55 million acquisition was financed with existing bank credit facilities. Chauvco began international operations in 1992 through acquisition of various interests in exploration, exploitation and production lands in Argentina. Chauvco continues to have an active development and exploratory drilling program in Argentina. In 1996 Chauvco began operations in Gabon, central west Africa, under two separate contracts. In July 1996, Chauvco negotiated a production sharing contract ("PSC") for the Remboue Permit. Chauvco is aggressively pursuing the start up of its operations on this prospect and began producing operations from the field in the August 1997. Chauvco also entered into a farm in agreement on the Mondah Bay Block, also in Gabon, where an offshore exploration well was drilled earlier in 1997. 147 157 MANAGEMENT OF CHAUVCO The name, municipality of residence and principal occupation of each of the directors and officers of Chauvco and the number of Chauvco Common Shares beneficially owned, directly or indirectly, or over which control or direction is exercised by each as of August 31, 1997 are set forth in the following table: Directors
CHAUVCO COMMON SHARES BENEFICIALLY NAME AND OWNED MUNICIPALITY DIRECTLY OR OF RESIDENCE DIRECTOR SINCE PRINCIPAL OCCUPATION INDIRECTLY - ---------------------------- ---------------- --------------------------------------- ------------ James R. Baroffio(2)(4) April 25, 1996 Corporate Director 1,800 Moraga, California Albert D. Cohen(5) March 3, 1988 Chairman & Chief Executive Officer, 68,750 Winnipeg, Manitoba Gendis Inc. (retail merchandising) Bernard F. Isautier(4) April 25, 1996 Corporate Director Nil Papeete, French Polynesia G. Allan MacKenzie(3) April 28, 1994 President & Chief Operating Officer, 1,000 Winnipeg, Manitoba Gendis Inc. (retail merchandising) Patrick J. Matthews(1)(4) March 3, 1988 Vice President, Finance, Gendis Inc. 1,000 Winnipeg, Manitoba (retail merchandising) John R. McCaig(3)(6) August 9, 1989 Chairman, Trimac Corporation 4,002 Calgary, Alberta (transportation and oilfield services) Stephen W.C. Mulherin(1)(4) April 28, 1994 Partner Nil Calgary, Alberta Polar Capital Corporation (investment management) W. Glen Russell April 25, 1996 President & Chief Operating Officer of 7,000 Calgary, Alberta Chauvco Guy J. Turcotte January 19, 1981 Chairman and Chief Executive Officer 1,212,972 Calgary, Alberta of Chauvco Antonie Vanden March 3, 1988 President Nil Brink(1)(2)(4) Tokay Resources Ltd. Calgary, Alberta (natural resource company) Francis G. Vetsch(2)(3) March 3, 1988 President 30,000 Calgary, Alberta Quantex Resources Ltd. (natural resource company)
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee (3) Member of the Corporate Governance & Nominating Committee (4) Member of the Strategic Issues Committee (5) Mr. Albert D. Cohen has an 18.8% interest in Gendis Inc. (6) Mr. John R. McCaig exercises joint control over a 14.0% interest in Trimac Corporation 148 158 Management
CHAUVCO COMMON SHARES BENEFICIALLY OWNED NAME AND MUNICIPALITY DIRECTLY OR OF RESIDENCE PRINCIPAL OCCUPATION INDIRECTLY - ---------------------------------------- --------------------------------------- ----------------- Guy J. Turcotte Chairman and Chief Executive Officer 1,212,972 Calgary, Alberta of Chauvco W. Glen Russell President & Chief Operating Officer of 7,000 Calgary, Alberta Chauvco James K. Wilson Senior Vice President, Finance & 2,300 Calgary, Alberta Administration and Chief Financial Officer of Chauvco M. Simon Hatfield Vice President, International Nil Calgary, Alberta Exploration of Chauvco Dennis L. Robertson Vice President, Acquisitions & 17,000 Calgary, Alberta Evaluations of Chauvco Stephen H. White Vice President, Business Development of 21,000 Calgary, Alberta Chauvco Glen C. Schmidt Vice President, Canada of Chauvco Nil Calgary, Alberta Martin A. Lambert Partner, Bennett Jones Verchere Nil Calgary, Alberta (barristers and solicitors) and Secretary of Chauvco
Each of the above listed individuals has been engaged in the principal occupation or in other capacities with the same firm or organization for the last five years except for Mr. Baroffio who prior to November 1, 1994 was President of Chevron Canada Resources; Mr. Isautier who prior to January 1, 1996, was President and C.E.O. of Canadian Occidental Petroleum Ltd.; Mr. Mulherin who prior to February 1997 was Vice President of Trimac Limited; Mr. Russell who prior to February 15, 1995 was Senior Vice President and Chief Operating Officer; Gulf Canada Resources Limited; Mr. Vetsch who prior to January 1, 1993 was Chairman of the Board, Chauvco; and Mr. Hatfield who prior to December 12, 1994 was Manager, Geology and Geophysics, Frontiers and International, PetroCanada Inc. Pursuant to the Combination Agreement, two of the directors of Chauvco will become directors of Pioneer. Dr. J. R. Baroffio will be appointed as a director of Pioneer at the Effective Time, and Mr. G. J. Turcotte will be nominated for election as a director at Pioneer's 1998 annual meeting. Further information with respect to these individuals is provided below. DR. J.R. BAROFFIO joined Standard Oil Company of California (which changed its name to Chevron Corporation) as a Development Geologist in 1958. In 1964 he received his doctorate in geology and engineering from the University of Illinois while on a three year educational leave of absence from Chevron. He rejoined Chevron and has held numerous technical and managerial positions in Texas, Louisiana, California, Colorado and Alberta, Canada since then, including Regional Vice President Northern Region, Denver from 1986-88, Vice President of Exploration, Chevron U.S.A. from 1988 to 1989 and finally, President of Chevron Canada Resources, Calgary, Alberta from 1989 until his retirement in 1995. He has served on various Boards and Committees both within and outside the oil and gas industry, including, member of the Rocky Mountain Oil and Gas Association ("RMOGA"), member of RMOGA's Operating and Executive Committees, President elect of the Colorado Petroleum Association and past President of the World Affairs Council of Orange County, California. GUY J. TURCOTTE founded Chauvco in January, 1981 and was appointed Chairman of the Board and Chief Executive Officer on January 1, 1993. From 1984 to 1988, and from 1989 to 1994, Mr. Turcotte served 149 159 on the board of the Canadian Association of Petroleum Producers (CAPP) (formerly IPAC). He has also served on various Boards in the industry and is currently on the Board of Directors of Gendis Inc., Trans-Dominion Energy Corporation, Alliance Pipeline Ltd., and is a member of the Young Presidents' Organization. Mr. Turcotte received the Independent Petroleum Association of Canada Chairman's Award in 1990 and the Wall Street Transcript Gold Award for the outstanding Chief Executive Officer of Canadian Junior Oil Producers in 1990. In 1991, he received the same award in the Canadian Intermediate Oil Producer category and the Pinnacle Award honoring Entrepreneurship in Alberta. As of August 31, 1997, all the directors and officers of Chauvco as a group beneficially owned or controlled, directly or indirectly, 1,366,824 common shares representing 2.8% of the issued and outstanding Chauvco Common Shares. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the compensation of Chauvco's Chief Executive Officer ("C.E.O.") and each of Chauvco's four other most highly compensated executive officers (collectively, the "Named Executive Officers") measured by base salary during the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION -------------------------------- ---------------------------- OTHER ANNUAL SECURITIES ALL OTHER NAME AND SALARY BONUS COMPENSATION UNDER OPTIONS COMPENSATION PRINCIPAL POSITION YEAR (C$)(1) (C$)(2) (C$)(3) GRANTED(#) (C$)(4) ------------------ ---- ------- ------- ------------ ------------- ------------ Guy J. Turcotte........................... 1996 275,040 -- 7,708 70,000 14,532 Chairman & C.E.O. 1995 273,787 -- 7,708 -- 14,469 1994 258,750 -- 7,636 100,000 13,636 W. Glen Russell(5)........................ 1996 210,000 -- 7,780 -- 7,601 President & C.O.O. 1995 52,500 -- 1,695 125,000 1,712 Guimar Vaca Coca.......................... 1996 156,996 -- 152,572 30,000 -- General Manager, Latin American 1995 228,162 -- 186,593 -- -- 1994 147,517 -- 188,953 53,800 45,075 James K. Wilson........................... 1996 150,900 -- 7,708 31,050 8,272 Senior Vice-President, Finance 1995 143,959 -- 7,708 -- 7,859 and Administration & C.F.O. 1994 124,619 -- 7,636 37,300 6,795 M. Simon Hatfield(6)...................... 1996 139,950 -- 7,780 28,650 6,125 Vice-President, 1995 135,000 -- 7,708 -- 4,509 International Exploration 1994 7,000 -- 553 25,000 370
- --------------- (1) Salary reviews are performed February 1st of each year, therefore salary reported represents 1 month at the rate in effect from January 1 to January 31 and 11 months at the rate in effect from February 1 to December 31. For Mr. Vaca Coca the amount reported in 1995 includes a retroactive increase paid during the year 1995, effective for the year 1994. (2) No bonuses were paid to Named Executive Officers during the years reported. (3) The amounts in this column include car allowance, club memberships and parking. For Mr. Vaca Coca, the amount includes income taxes and social security taxes paid to Argentine tax authorities (C$94,833 in 1996, C$106,626 in 1995 and C$104,064 in 1994), cost of living allowance (C$43,737 in 1996, C$59,782 in 1995 and C$61,662 in 1994), house expenses (C$11,075 in 1996, C$17,302 in 1995 and C$17,402 in 1994) and car expenses (C$2,927 in 1996, C$2,883 in 1995 and C$5,826 in 1994). (4) The amounts in this column, except the amounts relating to Mr. Vaca Coca, include Chauvco's contributions under the group employee registered retirement savings plan and in respect of term life insurance premiums. Named Executive Officers participate on the same basis as all other employees. For Mr. Vaca Coca, the amount represents Director's fees paid by Chauvco's Argentine subsidiaries during 1994. (5) Mr. Russell joined Chauvco on October 2, 1995. The salary paid to Mr. Russell in 1995 covers the period from October 2, 1995 to December 31, 1995. (6) Mr. Hatfield joined Chauvco on December 12, 1994. The salary paid to Mr. Hatfield in 1994 covers the period from December 12, 1994 to December 31, 1994. 150 160 EMPLOYEE STOCK OPTION PLAN In order to provide a long-term incentive for officers and employees of Chauvco, on March 3, 1988, the Chauvco Board adopted an employee stock option plan. On November 10, 1995, the Board of Directors adopted an updated and revised stock option plan (the "Employee Stock Option Plan") which complies with the revised guidelines of the TSE. The Employee Stock Option Plan generally provides that the Board of Directors may from time to time in its discretion grant to officers or employees of Chauvco the right to purchase Chauvco Common Shares. The exercise price per Chauvco Common Share is equal to the closing market price of the common shares on the date immediately preceding the date of grant. Unless otherwise approved by the Chauvco Board, options vest over a five year period with the first 20% of the award becoming exercisable after one year, the second 20% after two years, the third 20% after three years, the fourth 20% after four years, and the final 20% after five years. The following table sets forth certain information relating to the stock options granted to the C.E.O. and to each of the Named Executive Officers pursuant to the terms of Chauvco's Employee Stock Option Plan during the year ended December 31, 1996. OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1996
MARKET VALUE OF SHARES % OF TOTAL UNDERLYING OPTIONS OPTIONS AT SECURITIES GRANTED TO EXERCISE DATE OF UNDER OPTIONS EMPLOYEES IN PRICE GRANT NAME GRANTED(#) 1996 (C$/SHARE) (C$/SHARE) EXPIRATION DATE ---- ------------- ------------ ---------- ------------ --------------- Guy J. Turcotte....... 70,000 7.6 $12.25 $12.25 February 14, 2004 W. Glen Russell....... nil n/a n/a n/a n/a Guimar Vaca Coca...... 30,000 3.3 $12.25 $12.25 February 14, 2004 James K. Wilson....... 31,050 3.4 $12.25 $12.25 February 14, 2004 M. Simon Hatfield..... 28,650 3.1 $12.25 $12.25 February 14, 2004
The following table indicates that no stock options were exercised by the C.E.O. or any of the Named Executive Officers during the year ended December 31, 1996. The table details as at December 31, 1996 the number of vested and unvested options that were unexercised and the value of such options where they were in the money. AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1996 AND FINANCIAL YEAR-END OPTION VALUES
SECURITIES AGGREGATE VALUE OF UNEXERCISED ACQUIRED ON VALUE IN-THE-MONEY OPTIONS EXERCISE REALIZED UNEXERCISED OPTIONS AT AT DECEMBER 31, 1996 (#) ($) DECEMBER 31, 1996(#) (C$)(1) ----------- --------- ----------------------- ---------------------- NAME VESTED NON-VESTED VESTED NON-VESTED ---- -------- ----------- -------- ---------- Guy J. Turcotte........... nil -- 340,000 210,000 $873,000 $129,500 W. Glen Russell........... nil -- 25,000 100,000 $ 65,000 $260,000 Guimar Vaca Coca.......... nil -- 45,520 78,280 nil $ 55,500 James K. Wilson........... nil -- 14,920 53,540 nil $ 57,443 M. Simon Hatfield......... nil -- 10,000 43,650 nil nil
- --------------- (1) Based on December 31, 1996 close on the TSE of $14.10 per share. LONG TERM INCENTIVE PLANS Chauvco has a group registered retirement savings plan ("Group RRSP"), established in 1990, for full-time employees. Under the Group RRSP, Chauvco matches the employee contribution as to 3% in year one, 4% in year two, and 5% in year three and each year thereafter based on the employee's annual base earnings. 151 161 Each employee may select from a variety of investment options for his or her funds. Employees may make additional voluntary contributions by payroll deduction or periodic lump sums up to the maximum limits allowed under the Canadian Tax Act. All contributions to the Group RRSP are full vested when made and the employee contributions may be withdrawn by the employee at any time, subject to payment of applicable taxes, or transferred annually to a personal registered retirement savings plan. Other than the Group RRSP and Employees Stock Option Plan, details of which are provided above, Chauvco does not have any plans which provide compensation intended to serve as incentive for performance to occur over a period longer than one year. COMPOSITION OF THE COMPENSATION COMMITTEE The Compensation Committee is composed of three unrelated directors of Chauvco. Messrs. Vanden Brink, Baroffio and Vetsch served as the members of the Committee during the fiscal year ended December 31, 1996, with Mr. Vanden Brink acting as Chairman. From March 3, 1988 to January 1, 1993, Mr. Vetsch was Chairman of the Chauvco Board. REPORT ON EXECUTIVE COMPENSATION COMPONENTS OF COMPENSATION Chauvco's compensation policy is composed of base salary and benefits and the award of stock options. The Compensation Committee's role is to approve the overall compensation paid by Chauvco to its employees, based on industry medians from surveys conducted by independent consulting firms and taking into consideration a number of factors including the education and experience of the individual, the individual's performance and the financial performance of Chauvco. The Compensation Committee makes specific recommendations to the Chauvco Board on compensation with respect to Named Executive Officers and other senior officers. The policies of the Compensation Committee are designed to recognize and reward individual performance as well as provide a competitive industry level of compensation. Salaries for all employees are reviewed annually following performance reviews and adjusted on February 1st of each year. 152 162 Share participation through the Employee Stock Option Plan is used as a reward for annual performance and an incentive for future performance. The Compensation Committee determines the number of stock options to be granted to employees and makes recommendations to the Chauvco Board regarding the number of stock options to be granted to senior officers. The Compensation Committee reviews the total number of stock options issued in the past to determine grant sizes, and applies the internal limits set by the Compensation Committee. COMPENSATION OF CHIEF EXECUTIVE OFFICER The policy of the Compensation Committee with respect to the compensation for the C.E.O. is to set the C.E.O.'s base salary at approximately the median for public companies of comparable size and complexity, using competitive data from industry surveys to help determine the level of compensation. The C.E.O.'s salary is also based on Chauvco's overall success. DIRECTORS' COMPENSATION During 1996, directors who were not full time employees of Chauvco were paid an annual fee of C$10,000, a fee of C$750 for each directors' meeting and committee meeting attended in person and a fee of C$375 for each directors' meeting and committee meeting attended by telephone. The person who served as Chairman of each of the committees received a fee of C$1,000 for each committee meeting attended in person or by telephone. Total remuneration to directors for the year was C$188,375. CAPITALIZATION The following table sets forth the capitalization of Chauvco as at certain dates:
OUTSTANDING AS AT --------------------------------------- DESCRIPTION AUTHORIZED JUNE 30, 1997 AUGUST 31, 1997 - ------------------------------- ---------------- ------------------ ------------------ Operating line of credit....... C$ 20,000,000 Nil C$ 5,509,000 Commercial paper............... C$100,000,000 C$ 97,000,000 C$100,000,000 Term bank loan................. C$220,000,000 C$108,346,000 C$120,000,000 5.87% Senior notes payable..... U.S.$ 60,000,000 C$ 80,580,000 C$ 80,580,000 (U.S.$ 60,000,000) (U.S.$ 60,000,000) Common shares.................. unlimited C$216,660,000 C$217,080,000 (48,435,262 shares) (48,463,892 shares)
NOTES: (1) As of June 30, 1997, the balance of retained earnings was C$201,246,000. (2) Outstanding stock options granted to employees as of June 30, 1997 were for 2,943,815 Chauvco Common Shares. PRINCIPAL HOLDERS On August 31, 1997, Chauvco had outstanding 48,463,892 Chauvco Common Shares. To the knowledge of the management of Chauvco, the only persons or companies beneficially owning, directly or indirectly, or exercising control or direction over, more than 10% of the issued and outstanding Chauvco Common Shares as at August 31, 1997 were 3106829 Canada Inc., a wholly-owned subsidiary of Gendis Inc., who of record and beneficially owns 14,688,610 Chauvco Common Shares representing approximately 30.3% of all issued and outstanding Chauvco Common Shares, and Trimac Corporation who of record and beneficially owns 6,873,392 Chauvco Common Shares representing approximately 14.2% of all issued and outstanding Chauvco Common Shares. 153 163 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF CHAUVCO The following table sets forth selected historical consolidated financial information for Chauvco for the six months ended June 30, 1997 and 1996 and for each of the five fiscal years in the period ended December 31, 1996. The unaudited consolidated financial data as of and for the periods ended June 30, 1997 and 1996 have been prepared on a basis consistent with the audited Consolidated Financial Statements and, in the opinion of management, includes all adjustments, consisting of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. This data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations of Chauvco and the Consolidated Financial Statements of Chauvco and the related notes thereto included elsewhere herein. See Note 11 to the Consolidated Financial Statements for a reconciliation of Canadian generally accepted accounting principles ("GAAP") in Canadian dollars to United States (U.S.) GAAP in Canadian dollars.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, --------------------- --------------------------------------------------------- 1997 1996 1996 1995 1995 1993 1992 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF EARNINGS DATA: Canadian GAAP Revenue............... C$102,526 C$ 86,739 C$178,543 C$170,314 C$164,381 C$136,794 C$121,906 Net income............ 19,178 16,979 34,131 25,425 29,052 28,220 22,726 Net income per share............... 0.40 0.35 0.71 0.54 0.65 0.64 0.53 U.S. GAAP Revenue............... 102,526 86,739 178,543 170,314 164,381 (a) (a) Net income............ 21,280 19,259 41,276 33,337 24,562 (a) (a) Net income per share............... 0.44 0.40 0.85 0.71 0.55 (a) (a)
AS OF JUNE 30, AS OF DECEMBER 31, --------- -------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- -------------- (IN THOUSANDS) STATEMENT OF FINANCIAL POSITION DATA: Canadian GAAP Working capital (deficiency)......... C$ (3,912) C$ (7,441) C$ 7,477 C$ (749) C$(11,872) C$ 631 Total assets........... 830,493 637,436 590,490 564,652 384,603 332,052 Long-term debt......... 285,926 127,207 139,087 180,715 51,405 50,303 Shareholders' equity... 417,906 397,751 362,892 281,442 250,277 219,958 U.S. GAAP Working capital........ (3,912) (7,441) 7,477 (a) (a) (a) Total assets........... 782,264 585,453 526,601 (a) (a) (a) Long-term debt......... 285,926 127,207 139,087 (a) (a) (a) Shareholders' equity... 391,375 369,118 327,114 (a) (a) (a)
- --------------- (a) U.S. GAAP information for these periods is not available. 154 164 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CHAUVCO Certain amounts that follow are based on assumptions regarding future events. Actual results will vary from the estimated results, and the variation may be significant. Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
1997 1996 -------- -------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AND PER UNIT AMOUNTS) Net earnings................................................ 19,178 16,979 per share................................................. 0.40 0.35 Cash flow from operations................................... 59,518 48,448 per share................................................. 1.23 1.00 Capital expenditures........................................ 199,169 46,205 Long term debt.............................................. 285,926 144,816 Shareholders' equity........................................ 417,906 380,008 Petroleum and natural gas sales............................. 123,576 104,017 Average prices (excluding hedging) Oil ($/Bbl)............................................... 24.64 23.36 Gas ($/Mcf)............................................... 1.77 1.41 Common shares outstanding at period end..................... 48,435 48,293 Weighted average shares outstanding......................... 48,397 48,284
In April 1997, Chauvco purchased an additional 50% working interest in the Chinchaga, Alberta property for C$28 million. Chauvco has also acquired over 15 thousand additional acres to expand its exploratory land base in the Chinchaga area. Together, the acquisitions of Tidal and the additional acquired interest in Chinchaga have doubled Chauvco's Canadian gas reserves to approximately 360 billion cubic feet. Chauvco expects to participate in drilling approximately 15 development and exploration wells in each of the next three or four years at Chinchaga. Reserve additions for the first six months have been approximately 175% of expected 1997 production. Chauvco has concluded two significant acquisitions in Canada as well as delivering excellent drilling results in Argentina and Gabon. Chauvco's Remboue production field in Gabon has been developed with 10 horizontal wells set to come on-stream in the third quarter. Significant additional blocks in Gabon have also been acquired in the second quarter. Alliance Pipeline Project continues to progress on schedule for a November 1, 1999 on-stream target date. Financial and operating results point to confirmed significant growth in the near future. Chauvco's financial results for the first half of 1997 included a 13% increase in net earnings to C$19.2 million (C$0.40 per share) from C$17.0 million (C$0.35 per share) in 1996. Cash flow increased 23% to C$59.5 million (C$1.23 per share) from C$48.4 million (C$1.00 per share) in the prior year. Revenues were 19% higher at C$123.6 million compared to C$104.0 million in 1996 due to increased natural gas volumes in both Argentina and Canada, higher oil production in Argentina and better commodity prices. Wellhead crude oil prices rose 5% to C$24.64 per barrel from C$23.36 per barrel in the previous year, while natural gas prices rose 26% to C$1.77 per thousand cubic feet from C$1.41 per thousand cubic feet in 1996. Total operating expenses increased due to the higher production volumes. On a unit of production basis after processing income recoveries, costs were relatively unchanged at C$4.16 BOE (10:1) compared to C$4.11 BOE (10:1) in 1996. Depletion, depreciation and amortization expenses were 26% above the prior year as a result of increased production volumes and capital investment. Total capital expenditures, including C$87 million for acquisitions of Tidal and Chinchaga property interests, were C$199.2 million for the first half, compared to C$46.2 million for the first half of the previous year. Increased drilling activities in Argentina and Canada, together with new operations in Gabon, account for Chauvco's expanded capital investment program in 1997. 155 165 Fiscal 1996 Compared With Fiscal 1995 Major Transactions In the first quarter of 1996 Chauvco completed construction of the Martin Creek Pipeline, approximately 90 miles north of Fort St. John, British Columbia. Chauvco has significant acreage and reserves in the area. The pipeline allows Chauvco to transport corporate and third party gas out of the area at attractive prices. Industry reaction to the pipeline project has been positive with three producers committing to transport gas through the pipeline. During the year, Chauvco renegotiated its unsecured loan facilities with a syndicate of two Canadian banks and one foreign controlled Canadian bank, raising available limits from C$125 million to C$150 million. The interest rate on the outstanding debt is variable and approximates the lenders' prime rate. During the year Chauvco became a sponsor of the Alliance Pipeline Project which is proposed to be built from northeastern British Columbia to the United States midwest. When operational, Chauvco's management believes that this new pipeline will have a positive impact on the Canadian gas market, as this new outlet to the midwestern United States market is expected to increase natural gas export volumes from Canada in excess of one billion cubic feet per day. In addition to improved market access, the cost of transportation will be less than alternative facilities currently in place. Chauvco's management anticipates the linkage of this project to Chauvco's operations centered at Martin Creek in northeastern British Columbia. In Argentina, expansion of gas processing facilities at Tierra del Fuego was completed in the fourth quarter of 1996. The expansion will allow handling of increased production volumes committed for delivery under a contract to a petrochemical plant in Chile. The pipeline to connect the new facilities to the Chilean pipeline system was installed in 1996 and tested in January 1997. Natural gas deliveries under the contract to the plant in Chile commenced in January 1997 at a rate of 17 million cubic feet per day. The Canadian business unit was successful during 1996 in its effective rationalization of properties. Most significantly, in November, Chauvco through a swap agreement increased its working interest in the Rycroft oil pool in Alberta, Chauvco's third largest oil producing property, from 31% to 56.6% and became operator of that property. Internationally, Chauvco was successful in 1996 in securing two new ventures in Gabon, central west Africa. In July, Chauvco announced the successful negotiation of a PSC for the Remboue Block and is aggressively pursuing the start-up of its operations on this prospect. During the year Chauvco drilled one appraisal well and two development wells, and expects to begin production operations from the field in the third quarter of 1997. In the third quarter of 1996, Chauvco entered into a farm-in agreement with Santa Fe Energy Resources of Houston on the Mondah Bay Block where an offshore exploration well is expected to be drilled in the second quarter of 1997. After satisfying drilling obligations, Chauvco will hold 50% of this 377,816 acre block which is situated in reasonably close proximity to the Remboue Block. Effective January 3, 1997 Chauvco was successful in acquiring 100% of Tidal for C$55 million. Tidal was a Calgary based junior oil and gas exploration and production company with estimated proved reserves of 4.9 million barrels of oil and 37.1 billion cubic feet of natural gas. Probable additional reserves include 3.8 million barrels of oil and 26.4 billion cubic feet of natural gas. Production is approximately 10 million cubic feet per day of natural gas and 1,500 barrels per day of oil. Tidal's operations are focused in two main areas, the Chinchaga area in northwestern Alberta and the Haas area of North Dakota. 156 166 Results of Operations
1996 1995 --------- --------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AND PER UNIT AMOUNTS) Net earnings................................................ 34,131 25,425 per share................................................. 0.71 0.54 Cash flow from operations................................... 100,602 95,081 per share................................................. 2.08 2.01 Capital expenditures........................................ 148,798* 86,249 Long term debt.............................................. 127,207 139,087 Shareholders' equity........................................ 397,751 362,892 Petroleum and natural gas sales............................. 215,947 206,497 Average prices (excluding hedging) Oil ($/Bbl)............................................... 25.13 20.35 Gas ($/Mcf)............................................... 1.46 1.32 Common shares outstanding at year end....................... 48,353 48,278 Weighted average shares outstanding......................... 48,300 47,339
- --------------- * Includes $54.9 million for the Tidal acquisition. Overall 1996 revenue increased by 5% to C$215.9 million from C$206.5 million in 1995. The primary reasons for the increase in revenue were higher crude oil prices and higher natural gas prices in Canada partially offset by lower oil and natural gas production. Average WTI prices rose by 20% in 1996 to C$22.01 per barrel from C$18.38 per barrel in 1995. Chauvco's average wellhead prices were C$25.13 per barrel, a 23% increase from the 1995 average of C$20.35 per barrel as a result of the rise in WTI prices and reduced quality discounts for Canadian crude oil grades. Natural gas prices increased 11% in 1996 to average C$1.46 per thousand cubic feet from C$1.32 per thousand cubic feet in 1995. Natural gas prices in North America were generally strong during most of the year, with prices in Alberta remaining depressed as a result of continued supply/demand imbalance within the province and a lack of transportation capacity from the province. In Argentina prices remained stable throughout the year at C$1.37 per million cubic feet in Tierra del Fuego and increased slightly to C$1.71 per million cubic feet in Neuquen. However, a higher proportion of volume from the lower priced fields reduced the average price. Chauvco's business strategies are designed to enable Chauvco to effectively manage risks inherent in the industry which are outside of it's control. Consistent with this strategy, crude oil and natural gas prices were hedged on a portion of sales volumes throughout the year. Reflecting the longer term view of the markets taken by Chauvco and the continuing strength of oil prices, a loss of C$9.8 million was recorded in 1996 on hedging activities. Canadian average royalty rates rose to 20.3% of revenue in 1996 from 19.5% in the prior year. Average Canadian royalty rates rose as a result of higher commodity prices and royalty rate increases. The decline in gas royalties in 1996 reflects prior year adjustments relating to the new crown royalty structure in Canada. Argentine average royalty rate decreased to 12.4% of revenue from 13.3% in the prior year due to prior year adjustments included in 1995 which caused a higher than normal royalty rate percent in 1995. Chauvco does not anticipate increases in average royalty rates in 1997. Chauvco's operating expenses, after processing revenues, decreased 11% to C$42.5 million from C$47.6 million in the prior year. This was the result of volume decreases of 9% on a BOE (10:1) basis and a decrease in the cost per BOE (10:1) of 2% to C$4.17 per BOE (10:1) from C$4.25 per BOE (10:1) in the prior year. Canadian gas operating costs decreased to C$0.44/MCF mainly due to the significant offset of gas processing revenue in the British Columbia area. Interest expense decreased 13% to C$11.3 million from C$13.0 million in 1995 due to lower debt balances during 1996 and a decrease in interest rates. The average cost of funds for floating rate debt was 6.2%, a decrease from 7.7% in 1995 as a result of lower interest rates in Canada. Included in the current years 157 167 expense is C$0.9 million for the costs of Chauvco's interest rate hedges (1995 -- C$0.5 million) and C$1.8 million for a sovereign risk insurance policy for Argentine assets (1995 -- C$0.9 million). Administration costs, net of overhead recoveries, increased 7% to C$20.4 million from C$19.0 million in 1995. The majority of the increase reflects higher spending levels on international new ventures. During the year, C$10.9 million of administration expenses were capitalized, a 6% increase from C$10.3 million in 1995. The increase reflects a higher level of activity internationally. Depletion, depreciation and amortization expenses increased 1% to C$66.4 million in 1996 from C$65.5 million in 1995. This reflects an overall rate increase to C$6.50 per BOE (10:1) compared to C$5.85 per BOE (10:1) in 1995 due to the higher cost of reserve replacement. Included in depletion expense is C$1.6 million of international new venture costs incurred in countries where no further business development is planned (1995 -- C$0.4 million). The current year's expense also includes a C$2.7 million provision for future site restoration and abandonment of wells and facilities (1995 -- C$1.7 million). Income taxes increased 36% in 1996 to C$9.0 million from C$6.6 million in 1995. The overall income tax rate remained unchanged at 21% of earnings compared to 1995. Current income taxes increased to C$9.0 million in 1996 from C$3.6 million in 1995 as a result of higher taxable earnings in Canada. Marginally higher average effective tax rates in Canada resulted from increased non-deductible Crown royalty payments. Net earnings for 1996 were C$34.1 million (C$0.71 per share) a 34% increase from C$25.4 million (C$0.54 per share) in 1996. Net earnings for 1997 are expected to increase due to increased production from both Canadian and international operations. Changes in Cash Position Cash flow increased in 1996 to C$100.6 million (C$2.08 per share) from C$95.1 million (C$2.01 per share) in 1995. The major reasons for the increase were higher commodity prices, coupled with reduced interest costs and operating expenses. Canadian cash flow increased to C$61.7 million in 1996 from C$61.2 million in 1995 as a result of increased revenue and reduced interest costs offset by higher administration costs. Argentine cash flow increased to C$38.9 million in 1996 from C$33.9 million in 1995 due to higher revenue and lower operating costs. Chauvco repaid a net C$11.9 million of outstanding commercial paper and bank debt during the year and increased long term receivables by C$3.5 million as a result of higher value added tax receivables in Argentina. Value added taxes are expected to be recovered over the next several years from tax collected on a portion of our Argentine revenue. Total investing activities of C$100.9 million in 1996 was 16% higher than the C$87.3 million invested in the prior year. After adjustment for the acquisition of Tidal petroleum and natural gas capital expenditures increased 59.4% in 1996 to C$133.3 million from C$83.6 million in 1995 as a result of new exploration and development activities in Gabon, central west Africa. Expenditures for Gabon were C$13.6 million to year end 1996. Costs incurred for pipeline construction in northwestern British Columbia and Tierra del Fuego, Argentina amounted to C$14.4 million. Other Canadian investing activities in 1996 included C$2.1 million toward the proposed Alliance Pipeline Project. The pipeline, supported by several oil and gas producers, is to run from northeastern British Columbia to the midwestern United States. Subject to regulatory approvals, construction on the pipeline is expected to begin in the summer of 1998. Chauvco spent C$3.2 million on site restoration activities in 1996. Liquidity and Capital Resources In 1996, Chauvco reduced total debt from C$139.1 million to C$127.2 million. At year end, debt stood at just under 1.3 times 1996 cash flow. In January 1997, Chauvco used available bank credit facilities to finance its acquisition of Tidal for C$55 million. 158 168 Total debt at year end consisted of: C$80.6 million of senior notes with an effective fixed interest rate of 6.5% per annum and repayable beginning in August 1998; C$43.0 million of outstanding commercial paper which generally revolves every 30 to 60 days and C$3.6 million of bank borrowing under a C$150 million revolving term loan facility. Due to the term loan nature and available undrawn capacity within the bank credit facility, the commercial paper is classified as long-term debt. The bank debt revolves until June 2, 1997 at which time, with the agreement of Chauvco's bankers, the revolving term may be extended. Without mutual agreement to renew the facility, the loan would convert to a non-revolving five-year term loan, with repayments due in 1997 of approximately C$0.7 million. Such payments would be funded from cash flow. Outlook The price of crude oil during 1996 averaged U.S.$22.01 per barrel, a 20% improvement from U.S.$18.38 per barrel in the prior year. Prices were very strong from September through December averaging U.S.$25.12 per barrel in the final month of the year. Crude oil prices in Canadian dollar terms improved over 1995 prices as a result of reduced quality discounts for all grades of Canadian crude oil combined with strong demand. The NYMEX Henry Hub natural gas price was significantly higher in 1996 than 1995, averaging U.S.$2.50 per Mmbtu versus U.S.$1.69 per Mmbtu in the prior year. Henry Hub prices rallied significantly in late 1996 as a result of infrastructure constraints in the U.S. northeast and significant withdrawals from storage caused by very cold winter weather across most of the North American continent. Canadian natural gas prices were weak until later in the year due to an oversupply situation and a lack of pipeline capacity from Alberta. Prices late in 1996 have risen as a result of very cold weather in Alberta and British Columbia, which necessitated significant storage withdrawals. Slow growth rates in both Canada and the U.S. in late 1995 resulted in the central banks of both countries reducing the short-term interest rate to stimulate their economies. Canadian interest rates in 1996 have continued to decline to record low levels. The Bank of Canada prime rate average decreased 28% from 8.6% in 1995 to 6.18% in 1996. The Canadian dollar has remained stable throughout the year averaging U.S.$0.73, relatively unchanged from 1995. Based upon our assumption of U.S.$20.00 WTI crude oil prices, a stronger Canadian dollar relative to the U.S. dollar and unchanged Canadian natural gas prices, Chauvco forecasts that both 1997 earnings and cash flow will increase from 1996 levels as new production is brought on stream. In addition to the C$55 million acquisition of Tidal, Chauvco is planning a 1997 capital expenditure program that will exceed Chauvco's cash flow by approximately 20%. Chauvco will be flexible in allocating the capital expenditures between Canada, Argentina, Gabon and other international opportunities, choosing to fund those opportunities that offer the best return on investment. Fiscal 1995 Compared With Fiscal 1994 Results of Operations
1995 1994 --------- --------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AND PER UNIT AMOUNTS) Net earnings................................................ 25,425 29,052 per share................................................. 0.54 0.65 Cash flow from operations................................... 95,081 97,362 per share................................................. 2.01 2.19 Capital expenditures........................................ 86,249 216,990 Long term debt.............................................. 139,087 180,715 Shareholders' equity........................................ 362,892 281,442 Petroleum and natural gas sales............................. 206,497 189,061 Average prices (excluding hedging) Oil ($/Bbl)............................................... 20.35 17.96 Gas ($/Mcf)............................................... 1.32 1.58 Common shares outstanding at year end....................... 48,278 44,538 Weighted average shares outstanding......................... 47,339 44,441
159 169 Overall revenue increased by 9% to C$206.5 million from C$189.1 million in 1994. The primary reasons for the increase in revenue were higher crude oil prices and higher natural gas production volumes in Argentina, offset by significantly lower natural gas prices in Canada. Average WTI prices rose by 7% in 1995 to $18.38 per barrel from $17.19 per barrel in 1994. Chauvco's average wellhead prices were C$20.35 per barrel, a 13% increase from the 1994 average of C$17.96 per barrel as a result of the rise in WTI prices, a lower average Canadian dollar relative to the U.S. dollar and reduced quality discounts for Canadian crude oil grades. Natural gas prices fell 16% in 1995 to average C$1.33 per thousand cubic feet from C$1.58 per thousand cubic feet in 1994. Natural gas prices in North America were generally weak during most of the year, with prices in Alberta being extremely depressed as a result of an acute supply/demand imbalance within the province and a lack of transportation capacity from the province. Average royalty rates rose to 19.5% of revenue in 1995 from 17.6% in the prior year. Average Canadian royalty rates rose as a result of changes in the method of calculation of provincial royalties in Alberta. Argentine average royalty rate rose to 13.3% of revenue from 9.6% in the prior year. The prior years percentage was reduced as a result of recognizing some royalty reduction related to 1992 and 1993. Chauvco does not anticipate increases in average royalty rates in 1996 when compared to average 1995 rates. Chauvco's operating expenses, after processing revenues, increased 24% to C$47.6 million from C$38.5 million in the prior year. This was the result of volume increases of 5% on a BOE (10:1) basis and an increase in the cost per BOE (10:1) of 18% to C$4.25 per BOE (10:1) from C$3.61 per BOE (10:1) in the prior year. Costs in Canada rose as a result of handling increased volumes of water production on several oil properties and the fixed costs associated with shutting in several natural gas properties. Argentine costs rose as a result of higher unit costs on production from the Neuquen basin related principally to those properties acquired in late 1994. Chauvco anticipated that average operating costs would rise slightly in both Canada and Argentina in 1996. Interest expense increased 27% to C$13.0 million from C$10.2 million in 1994 from increased borrowing used to finance acquisitions during 1994 coupled with higher average rates in 1995. The average cost of funds for the floating rate debt was 7.7%, an increase from 5.9% in 1994 as a result of higher interest rates in Canada. Included in the current years expense is C$0.5 million for the costs of Chauvco's interest rate hedges (1994 -- C$1.1 million) and C$0.9 million for a sovereign risk insurance policy for Argentine assets (1994 -- C$0.3 million). Administration costs, net of overhead recoveries, increased 37% to C$19.0 million from C$13.8 million in 1994. The majority of the increase was the result of additional staff in Argentina and expenses of Chauvco's international new ventures group that was formed in early 1995. Administration expenses rose to C$1.69 per BOE (10:1) from C$1.29 per BOE (10:1) in 1994. This level is higher than our long term goal of C$1.20 per BOE (10:1) and is the result of the expanded operating base in Argentina and the formation of the international new ventures group in 1995. Chauvco anticipates that the average cost per BOE (10:1) will be reduced as additional production is realized on an international basis. During the year, C$10.3 million of administration expenses were capitalized, a 43% increase from C$7.2 million in 1994, as a result of the expenses incurred on Chauvco's international new ventures. Depletion, depreciation and amortization expenses increased 4% to C$65.5 million in 1995 from C$62.8 million in 1994. This reflects a 5% production increase on a BOE (10:1) basis coupled with an overall rate decrease to C$5.85 per BOE (10:1) compared to C$5.88 per BOE (10:1) in 1994. In 1995, Chauvco adopted the heat equivalency method of converting natural gas reserves and production to equivalent barrels of crude oil for purposes of calculating depletion, depreciation and amortization expense. The heat equivalency method is the basis of conversion employed by the vast majority of oil and gas companies operating in Canada. The current year's expense includes C$1.7 million (1994 -- C$1.5 million) for the future site restoration and abandonment of wells and facilities. 160 170 Income taxes decreased 42% in 1995 to C$6.6 million from C$11.6 million in 1994. The overall income tax rate declined to 20% of earnings from 28.5% in 1994 as a result of a higher portion of Chauvco's earnings being derived from the Tierra del Fuego properties which have a preferential tax regime. Current income taxes fell to C$3.6 million in 1995 from C$5.2 million in 1994 as a result of lower levels of taxable earnings in Canada. Higher average effective tax rates in Canada resulted from increased non-deductible Crown royalty payments. Net earnings for 1995 were C$25.4 million (C$0.54 per share) a 12% decrease from C$29.1 million (C$0.65 per share) in 1994. Net earnings for 1996 are expected to decrease slightly, the result of lower commodity prices and higher administration and operating expenses. Changes in Cash Position Cash flow decreased slightly in 1995 to C$95.1 million (C$2.01 per share) from C$97.4 million (C$2.19 per share) in 1994. The major reason for the decrease was higher operating, interest and administration expenses offset by a small increase in operating revenues. Canadian cash flow fell to C$61.2 million in 1995 from C$70.8 million in 1994 as a result of lower operating income and reduced investment income. Argentine cash flow increased to C$33.9 million in 1995 from C$26.6 million in 1994 due to higher operating income, offset by higher interest and administration expenses. Chauvco raised C$55.4 million from a share equity issue concluded in March 1995. Chauvco repaid a net C$41.7 million of outstanding commercial paper and bank debt during the year and increased long term receivables by C$13.2 million as a result of value added tax receivables in Argentina arising from purchases made in late 1994 and during 1995. Chauvco anticipates recovering the value added taxes over the next several years from tax collected on a portion of its Argentine revenue. Total investing activities of C$87.3 million in 1995 was 60% lower than the C$216.6 million invested in the prior year. Normal petroleum and natural gas capital expenditures were reduced 34% in 1995 to C$84.7 million from C$129.1 million in 1994 as a result of a more conservative capital investment program in light of significantly lower natural gas prices. During 1995 Chauvco did not conclude any significant acquisitions versus C$85.2 million invested in two acquisitions in Argentina during 1994. 161 171 PETROLEUM AND NATURAL GAS OPERATIONS Reserves. At December 31, 1996, Chauvco's proven and probable reserves, before royalties, were estimated at 74.9 million barrels of crude oil and NGLs and 664.6 billion cubic feet of natural gas of which 53% of the crude oil and 36% of the natural gas reserves are in North America. Reserve totals include 8.7 million barrels of crude oil and NGLs and 63.5 billion cubic feet of natural gas acquired from Tidal. At the end of 1996, Chauvco held petroleum and natural gas rights in approximately 2.2 million net acres of land, of which 1.8 million net acres were undeveloped. During 1996, daily crude oil and NGLs production averaged 18,609 barrels per day while natural gas production averaged 93.2 million cubic feet per day. Consolidated Reserves and Future Net Revenue The following table summarizes the changes in Chauvco's working interest share of petroleum and natural gas reserves before royalties from December 31, 1995 to December 31, 1996.
CANADA ARGENTINA GABON TOTAL ------ --------- ------ ------ PROVEN RESERVES RECONCILIATION CRUDE OIL AND NGLS (MBBLS) December 31, 1995........................................... 26,539 18,468 -- 45,007 Production.................................................. (5,512) (1,299) -- (6,811) Discoveries, extensions, acquisitions and dispositions*..... 5,977 513 5,453 11,943 Revisions................................................... 250 (897) -- (647) ------ ------ ------ ------ December 31, 1996........................................... 27,254 16,785 5,453 49,492 ------ ------ ------ ------ PROVEN AND PROBABLE RESERVES RECONCILIATION CRUDE OIL AND NGLS (MBBLS) December 31, 1995........................................... 34,559 25,607 -- 60,166 Production.................................................. (5,512) (1,299) -- (6,811) Discoveries, extensions, acquisitions and dispositions*..... 10,040 819 11,989 22,848 Revisions................................................... 509 (1,850) -- (1,341) ------ ------ ------ ------ December 31, 1996........................................... 39,596 23,277 11,989 74,862 ------ ------ ------ ------ PROVEN RESERVES RECONCILIATION NATURAL GAS (BCF) December 31, 1995........................................... 162.8 372.3 -- 535.1 Production.................................................. (14.7) (19.3) -- (34.0) Discoveries, extensions, acquisitions and dispositions*..... 43.5 4.0 -- 47.5 Revisions................................................... (11.5) (12.8) -- (24.3) ------ ------ ------ ------ December 31, 1996........................................... 180.1 344.2 -- 524.3 ------ ------ ------ ------ PROVEN AND PROBABLE RESERVES RECONCILIATION NATURAL GAS (BCF) December 31, 1995........................................... 190.5 458.2 -- 648.7 Production.................................................. (14.7) (19.3) -- (34.0) Discoveries, extensions, acquisitions and dispositions*..... 77.1 10.0 -- 87.1 Revisions................................................... (14.4) (22.8) -- (37.2) ------ ------ ------ ------ December 31, 1996........................................... 238.5 426.1 -- 664.6 ------ ------ ------ ------
- --------------- * Reserves attributed to Canada for the Tidal acquisition include 4,926 MBbls proven and 3,763 MBbls of probable crude oil and NGLs and 37.1 Bcf proven and 26.4 Bcf of probable natural gas reserves. 162 172 The following tables summarize Chauvco's consolidated reserves and estimated future net revenue, including Alberta Royalty Tax Credits to be derived therefrom, as evaluated by the independent petroleum consulting firms, Martin Petroleum and Associates and Gilbert Laustsen Jung Associates Ltd. Canadian and U.S. reserves include those attributed to the acquisition of Tidal. All evaluations of future net production revenue set forth in the tables are stated prior to provision for income taxes and indirect costs and after deduction of royalties. It should not be assumed that the discounted net revenues shown below represent the fair market value of the reserves.
GROSS RESERVES(1) NET RESERVES(1) ------------------------------ ------------------------------ CRUDE OIL CRUDE OIL AND NATURAL AND NATURAL CONDENSATE NGLS GAS CONDENSATE NGLS GAS (MBBLS) (MBBLS) (BCF) (MBBLS) (MBBLS) (BCF) ---------- ------- ------- ---------- ------- ------- CRUDE OIL AND NATURAL GAS RESERVES BASED ON ESCALATING PRICE ASSUMPTIONS Proved Reserves(2) Producing(3)........................... 31,544.8 5,113.6 376.4 26,457.6 4,215.2 321.7 Non-Producing(4)....................... 5,327.4 1,548.1 121.2 4,444.2 1,320.0 102.9 Undeveloped............................ 5,899.6 58.5 26.7 4,916.7 45.9 21.7 -------- ------- ----- -------- ------- ----- Total Proved................... 42,771.8 6,720.2 524.3 35,818.5 5,581.1 446.3 Probable Reserves(5)..................... 23,385.4 1,985.1 140.3 19,104.8 1,614.2 117.7 -------- ------- ----- -------- ------- ----- Total Proved and Probable Reserves..................... 66,157.2 8,705.3 664.6 54,923.3 7,195.3 564.0 ======== ======= ===== ======== ======= =====
DISCOUNTED AT THE RATE OF --------------------------------- UNDISCOUNTED 8% 10% 12% ------------ --------- --------- --------- PRESENT WORTH BEFORE TAX OF FUTURE NET PRODUCTION REVENUE BASED ON ESCALATING PRICE ASSUMPTIONS (6)(7)(9)(10)(THOUSANDS OF DOLLARS) Proved Reserves(2) Producing(3)................................ C$ 952,742 C$622,327 C$573,400 C$531,949 Non-Producing(4)............................ 347,913 110,141 87,623 71,024 Undeveloped................................. 78,448 53,128 48,970 45,344 ----------- --------- --------- --------- Total Proved........................ 1,379,103 785,596 709,993 648,317 Probable Reserves at 50%(5)................... 307,727 110,400 92,756 79,547 ----------- --------- --------- --------- Total Proved and Probable Reserves.......................... C$1,686,830 C$895,996 C$802,749 C$727,864 =========== ========= ========= =========
GROSS RESERVES(1) NET RESERVES(1) ------------------------------ ------------------------------ CRUDE OIL CRUDE OIL AND NATURAL AND NATURAL CONDENSATE NGLS GAS CONDENSATE NGLS GAS (MBBLS) (MBBLS) (BCF) (MBBLS) (MBBLS) (BCF) ---------- ------- ------- ---------- ------- ------- CRUDE OIL AND NATURAL GAS RESERVES BASED ON CONSTANT PRICE ASSUMPTIONS(6)(8)(9) Proved Reserves(2) Producing(3)........................... 31,558.5 5,106.6 374.9 26,566.9 4,207.6 321.3 Non-Producing(4)....................... 5,327.0 1,548.1 121.2 4,646.2 1,319.7 101.7 Undeveloped............................ 5,897.0 56.7 26.0 4,890.4 44.3 22.2 -------- ------- ----- -------- ------- ----- Total Proved................... 42,782.5 6,711.4 522.1 36,104.4 5,571.6 445.2 Probable Reserves(5)..................... 23,440.2 1,983.5 139.9 19,403.3 1,612.7 116.1 -------- ------- ----- -------- ------- ----- Total Proved and Probable Reserves..................... 66,222.7 8,694.9 662.0 55,507.3 7,184.3 561.3 ======== ======= ===== ======== ======= =====
163 173
DISCOUNTED AT THE RATE OF --------------------------------- UNDISCOUNTED 8% 10% 12% ------------ --------- --------- --------- PRESENT WORTH BEFORE TAX OF FUTURE NET PRODUCTION REVENUE BASED ON CONSTANT PRICE ASSUMPTIONS (THOUSANDS OF DOLLARS) Proved Reserves(2) Producing(3)................................ C$ 834,221 C$576,117 C$535,377 C$500,358 Non-Producing(4)............................ 217,094 78,740 64,254 53,278 Undeveloped................................. 62,094 44,939 41,830 39,061 ----------- --------- --------- --------- Total Proved........................ 1,113,409 699,796 641,461 592,697 Probable Reserves at 50%(5)................... 199,640 88,596 76,764 67,472 ----------- --------- --------- --------- Total Proved and Probable Reserves.......................... C$1,313,049 C$788,392 C$718,225 C$660,169 =========== ========= ========= =========
164 174 NOTES TO CONSOLIDATED ESCALATING AND CONSTANT PRICE RESERVES AND ESTIMATED FUTURE NET REVENUE TABLES (1) "Gross reserves" are defined as the total Chauvco working interest share of reserves. "Net reserves" are defined as Chauvco's gross reserves less all royalties and governments share of profit oil in excess of corporate income taxes payable to the government and others. (2) "Proved reserves" are those reserves estimated as recoverable under current technology and existing economic conditions in the case of constant price and cost analysis and anticipated economic conditions in the case of escalated price and cost analysis from that portion of a reservoir which can be reasonably evaluated as economically productive on the basis of analysis of drilling, geological, geophysical and engineering data, including the reserves to be obtained by enhanced recovery processes demonstrated to be economic and technically successful in the subject reservoir. (3) "Proved producing reserves" are those proved reserves that are actually on production or, if not producing, that could be recovered from existing wells or facilities and where the reason for the current non-producing status is the choice of the owner rather than the lack of markets or some other reason. An illustration of such a situation is where a well or zone is capable but is shut-in because its deliverability is not required to meet contract commitments. Producing reserves require near zero capital to be expended in order to be produced. (4) "Proved non-producing reserves" are those proved reserves that are not currently producing either due to lack of facilities and/or markets. (5) "Probable reserves" are those reserves which analysis of drilling, geological, geophysical and engineering data does not demonstrate to be proved under current technology and existing economic conditions but where such analysis suggests the likelihood of their existence and future recovery. Probable reserves to be obtained by the application of enhanced recovery processes, will be the increased recovery over and above that estimated in the proved category, which can be realistically estimated for the pool on the basis of enhanced recovery processes which can be reasonably expected to be instituted in the future. For purposes of this information circular, Chauvco has reduced its present worth values on probable reserves by 50% to account for geological and engineering risk factors. (6) "Net production revenue" is income derived from the sale of net reserves of petroleum and natural gas, less all capital costs, production taxes and operating costs and before provision for income taxes and administrative overhead costs. (7) The escalating price assumptions assume the continuance of current laws and regulations and any increases in wellhead selling prices and take into account inflation with respect to future operating and capital costs. In the escalating price assumption evaluation contained in the reserve reports, operating and capital costs have been escalated in accordance with Note 10 below. The oil and gas price forecasts effective January 1, 1997 are summarized as follows:
CRUDE OIL PROPANE BUTANE ----------------------------------------------------------- ----------- ----------- EDMONTON CITY WTI ARGENTINA FIELD GABON FIELD GATE ARGENTINA ARGENTINA (U.S.$/BBL) (U.S.$/BBL) (U.S.$/BBL) (CS/BBL) (U.S.$/BBL) (U.S.$/BBL) ----------- --------------- ----------- ------------- ----------- ----------- 1997................. 21.00 18.78 18.10 27.40 13.61 15.39 1998................. 21.00 16.71 18.10 27.40 12.13 13.72 1999................. 21.00 17.67 18.10 27.40 12.77 14.43 2000................. 21.50 18.63 18.60 28.00 13.39 15.14 2001................. 22.25 19.12 19.35 29.00 13.75 15.54 2002................. 23.00 19.60 20.10 30.00 14.08 15.92 2003................. 23.75 20.07 20.85 31.00 14.42 16.13 2004................. 24.50 20.55 21.60 32.00 14.76 16.69 2005................. 25.25 21.02 22.35 33.00 15.10 17.07 Thereafter........... +3.5% +3.5% +3.5% +3.5% +3.5% +3.5% NATURAL GAS ----------------------- ARGENTINA CANADA (U.S.$/MCF) C$/MMBTU) ----------- --------- 1997................. 1.07 1.55 1998................. 1.09 1.75 1999................. 1.14 1.95 2000................. 1.14 2.15 2001................. 1.16 2.30 2002................. 1.18 2.45 2003................. 1.20 2.55 2004................. 1.26 2.70 2005................. 1.28 2.85 Thereafter........... +3.5% +3.5%
(8) The constant price assumptions assume the continuance of current laws, regulations and operating costs in effect on the date of the reserve reports. The Canadian net production revenue was derived using a WTI price of $21.00 (Edmonton City Gate crude oil price of C$27.40) in 1997 and 1997 gas prices, 165 175 ranging from C$1.25/Mmbtu to C$1.70/Mmbtu depending upon the contract and have not been escalated beyond 1997. In addition, operating and capital costs have not been increased on an inflationary basis. Average field prices for crude of $18.85/Bbl in Argentina and $18.10/Bbl in Gabon were also derived using a WTI price of $21.00/Bbl. Argentina average field prices of $13.75/Bbl, $15.54/Bbl and $1.07/mcf were used for propane, butane and natural gas respectively. (9) Total capital costs, net to Chauvco, necessary to achieve the estimated future net proved and probable production revenues, based on escalating price and cost assumptions, are estimated to be C$104.6 million with C$53.9 million, C$26.2 million and C$5.3 million of such costs to be incurred in fiscal years 1997, 1998 and 1999, respectively. The comparable values for the constant cost assumptions are C$98.7 million with C$53.6 million, C$24.8 million, C$7.2 million in 1997, 1998 and 1999 respectively. These values relate to the total proved and probable reserve cases. (10) The costs used in the Escalating Price Assumption case have been escalated by 3.5% per year beginning in 1998. Description of Properties Thompson/Alliance. The Thompson Lake area is located 130 miles southeast of Edmonton, Alberta. In 1996, additional water handling facilities were installed to optimize production and reserve recovery. There are currently 90 oil wells (85.5 net wells) in the area. Working interest production averaged 2,583 and 496 barrels per day for Thompson and Alliance during 1996, respectively. Chauvco's average interest is 94.5% in Thompson and 100% in Alliance. Spirit River/Rycroft. Chauvco has interests in the Spirit River/Rycroft area (40 miles north of Grande Prairie, Alberta) which consists of four separate oil units, plus some minor non-unit reserves. During 1996 Chauvco increased its interest in the Rycroft properties by an average of 22%. The interests vary from 35.4% to 56.6% in the Rycroft Units. Chauvco now operates this area. A recent and successful drilling program in the major Rycroft unit will be followed up with the drilling of additional wells planned for 1997. A workover program to stimulate the wells was also successful during 1996. Average production from Rycroft was 1,521 barrels per day of oil and 0.9 million cubic feet of natural gas per day during 1996. With the change in ownership, the average net production from these properties has reached 2,663 barrels per day. Cherhill. Chauvco owns an 93% working interest in the Cherhill Banff H Pool Unit after purchasing an additional 10% during 1996. The unit is located 65 miles northwest of Edmonton, Alberta. Oil and gas have been produced concurrently since a gas plant was built and the pool was unitized during 1993. The average production for 1996 was 372 barrels per day of oil with 3.2 million cubic feet per day of solution and associated natural gas. There are currently 17 wells (15.9 net oil wells) in the Unit. Killam. The Chauvco ownership interests in the Killam area, located approximately 90 miles southeast of Edmonton, Alberta vary from 23 to 50%. There are currently 50 producing (20.2 net) oil wells at Killam. Production averaged approximately 400 barrels per day of oil and minor amounts of conserved solution gas during 1996. Choice. The Choice property, located approximately 120 miles northeast of Calgary, is comprised of an oil Unit, and various non-unit oil and gas wells. Chauvco's working interest production from the Choice property averaged 1,065 barrels per day of oil together with minor volumes of natural gas during 1996. The Company owns an average 96% of the oil production. There are 50 producing oil wells (48 net oil wells) and three gas wells (1.9 net gas wells) in the property. Nevis. The Nevis property is located approximately 20 miles east of Red Deer, Alberta. In 1996 Chauvco reviewed and identified Nisku/Leduc exploration potential in the Nevis area. Three 3-D seismic programs were completed in the third quarter of 1996. Production from Nevis was 273 barrels of oil per day and an average 3.5 million cubic feet of natural gas per day during 1996. 166 176 Swalwell. The Swalwell property is located approximately 42 miles northeast of Calgary. In 1996 Chauvco continued exploitation of the Nisku C&D pool. Three wells were drilled resulting in two producing oil wells. One additional drilling location is tentatively planned for 1997. Also in 1996, Chauvco began the exploitation of an acquisition in the area completed in the fourth quarter of 1995. Two Nisku wells were drilled and cased, one being a horizontal well. Incremental oil production from the vertical well is averaging 70 barrels per day and the horizontal well tested at a flowing rate of 75 barrels per day. Pumping equipment was installed in January 1997. Uphole potential was also evaluated on the acquired lands. Four recompletions were done for incremental production of 2.0 million cubic feet of natural gas per day. Additional recompletions are planned for 1997 along with two Pekisko drilling locations. Chauvco made two minor acquisitions in 1996 and is pursuing additional interests in the area. The average oil production from Swalwell during 1996 was 569 barrels per day along with 2.3 million cubic feet per day of natural gas. David. The David property is located approximately 180 miles northeast of Calgary. Chauvco owns a 100% working interest in certain producing properties in the David area of east central Alberta where there are 21 producing wells which are operated by Chauvco. A waterflood recovery project has been operating there successfully since 1989. During 1996 the average oil production was 2,294 barrels per day. Martin Creek. The Martin Creek property, located 85 miles north of Fort St. John, B.C., commenced production in March, 1993 through an existing competitor's facility. Chauvco completed construction of its own compression facility in 1995 and a 12-inch pipeline connecting the Martin Creek area to Westcoast Transmission's Aitken Creek gas plant in the first quarter of 1996 to handle Chauvco and third party production from the area. Chauvco's share of production averaged 9.6 million cubic feet per day of gas during 1996 from 10 wells (8.93 net wells). Tierra del Fuego. The Tierra del Fuego production concession is located in the extreme southern portion of Argentina, approximately 1,500 miles south of the country's capital, Buenos Aires. Crude oil, natural gas, condensate and NGLs are produced from six separate fields in which Chauvco has a 35% working interest. Chauvco's share of production during 1996 averaged 1,622 barrels per day of oil and condensate, 530 barrels per day of propane and butane, and 44.0 million cubic feet per day of natural gas. The most significant area is the San Sebastian field which accounts for approximately 40% of crude oil and condensate production, 100% of propane and butane production, and 84% of natural gas sales from the concession. In Argentina, expansion of gas processing facilities at Tierra del Fuego was completed in the fourth quarter of 1996. The expansion will allow handling of increased production volumes committed for delivery under a gas contract to a petrochemical plant in Chile. The pipeline to connect the new facilities to the Chilean pipeline system was installed in 1996 and tested in January 1997. Natural gas deliveries under the contract to the methanol plant in Chile commenced in January 1997 at a rate of 17.0 million cubic feet per day. Neuquen. Chauvco's operated production in Argentina is concentrated in the Neuquen Basin which is located about 925 miles southwest of the country's capital city and just to the east of the Andes Mountains. During 1996, Chauvco operated production from three contiguous blocks: Loma Negra/NI, Dadin and Al Norte de la Dorsal. Crude oil and natural gas are produced from two separate fields in the Loma Negra/NI Block in which Chauvco has a 100% working interest. Chauvco's production during 1996 averaged 63 barrels per day of oil and 3.3 million cubic feet per day of natural gas. Crude oil and natural gas are produced from the Huincul field in the Dadin Block in which Chauvco has a 100% working interest. Chauvco's production during 1996 averaged 183 barrels per day of oil and 2.2 million cubic feet per day of natural gas. 167 177 Crude oil and natural gas are produced from three oil fields and one natural gas field in the Al Norte de la Dorsal Block in which Chauvco has a 100% working interest. Chauvco's production during 1996 averaged 1,124 barrels per day of oil and 3.1 million cubic feet per day of natural gas. The most significant reserves accumulation is in the Guanaco field which accounts for 54% of the crude oil production and 37% of natural gas sales from the block. Pursuant to the interpretation of a 3-D seismic program shot in 1995 and appraisal drilling in 1996, a 40 - 60 well program is currently underway on this block. Production History Chauvco's working interest in production of petroleum and natural gas, before deduction of royalties, for each of the indicated years was as follows:
TO JUNE 30, --------------------------------------------------- 1997 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ ------ Crude oil and NGLs Total production (Mstb)................... 3,558 6,811 7,597 7,575 7,187 6,641 Average daily production (Bbls/d)......... 19,659 18,609 20,815 20,754 19,689 18,144 Natural Gas Total production (MMcf)................... 21,392 34,094 35,911 31,002 20,093 13,765 Average daily production (MMcf/d)......... 118.2 93.2 98.4 84.9 55.0 37.6
Producing Properties Average Daily Production The following table sets out Chauvco's working interest share of average daily production, before deduction of royalties, by area for the years indicated, and the percentage of the total production represented by each area.
% OF % OF % OF CRUDE OIL AND NGLS (BBLS/D) 1996 TOTAL 1995 TOTAL 1994 TOTAL --------------------------- ------ ----- ------ ----- ------ ----- Canada Alberta Thompson Lake/Alliance........ 3,079 16.6 3,379 16.2 3,727 18.0 David......................... 2,294 12.3 2,289 11.0 2,322 11.2 Spirit River/Rycroft.......... 2,156 11.6 2,194 10.5 1,789 8.6 Choice........................ 1,065 5.7 1,211 5.8 1,658 8.0 Lookout Butte................. 663 3.7 831 4.0 851 4.1 Swalwell...................... 569 3.1 703 3.4 710 3.4 Killam........................ 400 2.1 499 2.4 659 3.2 Cherhill...................... 372 2.0 474 2.3 547 2.6 Other......................... 3,485 18.7 4,163 20.0 4,827 23.3 ------ ----- ------ ----- ------ ----- 14,083 75.8 15,743 75.6 17,090 82.4 Saskatchewan.................... 659 3.5 789 3.8 799 3.8 British Columbia................ 305 1.6 240 1.2 240 1.2 Manitoba........................ 15 0.1 17 0.1 15 0.1 ------ ----- ------ ----- ------ ----- Total Canada.................... 15,062 81.0 16,789 80.7 18,144 87.5 ------ ----- ------ ----- ------ ----- Argentina Tierra del Fuego........... 2,152 11.5 2,252 10.8 2,228 10.7 Neugquen................... 1,395 7.5 1,774 8.5 382 1.8 ------ ----- ------ ----- ------ ----- Total Argentina................. 3,547 19.0 4,026 19.3 2,610 12.5 ------ ----- ------ ----- ------ ----- Total................. 18,609 100.0 20,815 100.0 20,754 100.0 ====== ===== ====== ===== ====== =====
168 178
% OF % OF % OF NATURAL GAS (MMCF/D) 1996 TOTAL 1995 TOTAL 1994 TOTAL -------------------- ----- ----- ----- ------ ----- ------ Canada Alberta Lookout Butte.................... 4.5 4.8 5.8 5.9 5.3 6.2 Nevis............................ 3.5 3.8 2.7 2.7 2.9 3.4 Cherhill......................... 3.2 3.4 3.1 3.2 2.7 3.2 Other............................ 12.2 13.1 18.1 18.4 18.2 21.5 ----- ----- ----- ----- ----- ----- 23.4 25.2 29.7 30.2 29.1 34.4 ----- ----- ----- ----- ----- ----- British Columbia Martin Creek..................... 9.6 10.3 3.3 3.4 5.0 5.9 Other............................ 7.2 7.7 7.0 71.0 7.2 8.5 ----- ----- ----- ----- ----- ----- 16.8 18.0 10.3 10.5 12.2 14.3 ----- ----- ----- ----- ----- ----- Saskatchewan....................... 0.2 0.2 0.4 0.4 0.8 0.9 ----- ----- ----- ----- ----- ----- Total Canada....................... 40.4 43.4 40.4 41.1 42.1 49.6 ----- ----- ----- ----- ----- ----- Argentina Tierra Del Fuego................. 44.0 47.2 43.1 43.7 40.5 47.7 Neuquen.......................... 8.8 9.4 14.9 15.2 2.3 2.7 ----- ----- ----- ----- ----- ----- Total Argentina.................... 52.8 56.6 58.0 58.9 42.8 50.4 ----- ----- ----- ----- ----- ----- Total.............................. 93.2 100.0 98.4 100.0 84.9 100.0 ===== ===== ===== ===== ===== =====
Productive Wells The following table summarizes, as at December 31, 1996, Chauvco's interests in producing wells and in non-producing gas wells which Chauvco believes are capable of commercial production of petroleum or natural gas. The stated interests are subject to landowners' and other royalties, where applicable, in addition to the usual government royalties or mineral taxes.
PRODUCING OIL PRODUCING GAS NON-PRODUCING WELLS WELLS WELLS ------------------- ------------------- ------------------- GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2) --------- ------- --------- ------- --------- ------- CANADA(3) Alberta..................................... 1,052 403 195 78 544 208 Saskatchewan................................ 73 30 3 1 58 20 British Columbia............................ 16 7 48 32 32 17 Manitoba.................................... 44 2 -- -- 16 1 ----- --- ----- --- ----- --- 1,185 442 246 111 650 246 ----- --- ----- --- ----- --- UNITED STATES(3) North Dakota................................ 64 62 -- -- 5 5 ----- --- ----- --- ----- --- 64 62 -- -- 5 5 ----- --- ----- --- ----- --- ARGENTINA Tierra del Fuego............................ 92 32 28 10 273 96 Neuquen..................................... 97 97 27 27 162 157 Santa Cruz.................................. -- -- -- -- 16 16 Rio Negro................................... 1 1 -- -- 1 -- ----- --- ----- --- ----- --- 190 130 55 37 452 269 ----- --- ----- --- ----- --- GABON Remboue..................................... -- -- -- -- 3 3 ----- --- ----- --- ----- --- Total............................. 1,439 634 301 148 1,110 523 ===== === ===== === ===== === Average working interest.................... 44.1% 49.2% 47.1%
169 179 - --------------- Notes: (1) "Gross wells" means the number of wells in which Chauvco has a working interest. (2) "Net wells" means the aggregate number of wells obtained by multiplying each gross well by Chauvco's percentage working interest therein. (3) Includes 67 gross (63 net) producing oil wells, seven gross (three net) producing gas wells and 15 gross (12 net) non-producing wells acquired through Tidal effective January 3, 1997. Land Holdings The following table sets forth Chauvco's land holdings of petroleum and natural gas rights as at December 31, 1996.
DEVELOPED UNDEVELOPED ------------------- ------------------- GROSS NET GROSS NET ACRES(1) ACRES(2) ACRES(1) ACRES(2) -------- -------- -------- -------- (IN THOUSANDS) CANADA(3) Alberta.................................................... 288 121 366 255 Saskatchewan............................................... 1 0 2 0 British Columbia........................................... 72 43 235 154 Manitoba................................................... 13 3 17 12 ----- --- ----- ----- 374 167 620 421 ----- --- ----- ----- UNITED STATES North Dakota............................................... 5 4 3 2 ----- --- ----- ----- ARGENTINA Tierra del Fuego........................................... 601 210 645 580 Neuquen.................................................... 91 91 201 168 Santa Cruz................................................. -- -- 67 67 Rio Negro.................................................. -- -- 130 130 ----- --- ----- ----- 692 301 1,043 945 ----- --- ----- ----- GABON Remboue.................................................... 2 2 222 200 Mondah Bay................................................. -- -- 378 189 ----- --- ----- ----- 2 2 600 389 ----- --- ----- ----- Total...................................................... 1,073 474 2,226 1,757 ===== === ===== =====
- --------------- Notes: (1) "Gross Acres" represents the total number of acres in which Chauvco has an interest. (2) "Net Acres" refers to the total of the acres in which Chauvco has an interest multiplied by the percentage interest of Chauvco therein. (3) Includes land holdings acquired through Tidal effective January 3, 1997 of 84.9 thousand gross acres (37.9 net) of which 61.2 thousand acres (22.7 net) are undeveloped. 170 180 Drilling Activity Chauvco drilled, or participated in the drilling of the following wells during 1995, 1996 and the first six months of 1997.
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- TO JUNE 30, 1997 1996 1995 ------------------ ------------------ ------------------ GROSS(1) NET(2) GROSS(1) NET(2) GROSS(1) NET(2) -------- ------ -------- ------ -------- ------ CANADA Crude oil........................... 14 2.0 53 15.7 40 26.0 Natural gas......................... 21 16.0 8 2.5 13 8.4 Service............................. -- -- 2 1.1 2 1.9 Dry and abandoned................... 8 6.5 22 18.2 12 8.0 ----- ---- ----- ---- -- ---- Total Wells......................... 43 24.5 85 37.5 67 44.3 ----- ---- ----- ---- -- ---- Success Ratio....................... 73% 51% 82% ARGENTINA Crude oil........................... 28 26.1 14 12.2 4 3.0 Natural gas......................... 7 7.0 5 5.0 1 1.0 Dry and abandoned................... 4 4.0 6 4.4 6 5.5 ----- ---- ----- ---- -- ---- Total Wells......................... 39 37.1 25 21.6 11 9.5 ----- ---- ----- ---- -- ---- Success Ratio....................... 89% 80% 42% GABON Crude oil........................... 9 8.1 3 2.7 -- -- Dry and abandoned................... 2 1.9 -- -- -- -- ----- ---- ----- ---- -- ---- Total Wells......................... 11 10.0 3 2.7 -- -- ----- ---- ----- ---- -- ---- Success Ratio....................... 81% 100%
- --------------- Notes: (1) "Gross wells" means the number of wells in which Chauvco has a working interest. (2) "Net wells" means the aggregate number of wells obtained by multiplying each gross well by Chauvco's percentage working interest therein and are, in some cases, subject to adjustment after payout. Marketing of Production Canadian Marketing -- Crude Oil. Chauvco enjoyed an exceptional pricing environment in 1996 due to a combination of factors. The WTI monthly price averaged U.S.$22.01 per barrel for the year, up U.S.$3.61 per barrel from 1995. The Canadian light sweet price posted WTI differential narrowed to historical low levels in 1996 averaging U.S.$0.56 per barrel versus U.S.$0.87 per barrel in 1995. Differentials between light and heavy crudes have averaged just around U.S.$3.00 per barrel in 1996 giving Canadian producers the highest heavy oil prices in the past decade. In addition, Canadian producers continue to benefit from a relatively weak Canadian dollar as the exchange rate remained in the U.S.$/C$0.73 range throughout the year. Pipeline transportation space apportionment on the Interprovincial Pipe Line ("IPL") system, the major carrier of crude oil from western Canada to eastern Canada and the eastern United States, continued in 1996 despite industry attempts to resolve the problem. Despite these difficulties, Chauvco managed to avoid shut-in oil and discount markets throughout the year. Two pipeline expansions are nearing completion. An expansion of the IPL system, referred to as the IPL SEP I, which accesses eastern Canadian and midwest U.S. markets, will add 120,000 barrels per day to existing capacity in early 1997. The Express Pipeline 170,000 barrels per day system from Hardisty to Casper, Wyoming, was completed in late 1996. Uncertainty remains as to the relief these expansions will have on IPL volume apportionment. 171 181 Argentine Marketing -- Crude Oil. In Argentina, Chauvco's crude oil and condensates are sold in the domestic market on short term contracts based on WTI prices. Payments for deliveries are made to Chauvco in U.S. dollars. Chauvco continues to use third party marketers to ensure the best possible contract terms as well as guaranteed access to the Oldelval pipeline system, which transports crude oil to the refineries located at Bahia Blanca, 700 kilometers south of Buenos Aires, and in the Buenos Aires area. The oil and condensate, transported by ship from Tierra del Fuego, continues to be sold to a large independent refinery in Buenos Aires. Chauvco's liquids from natural gas production in Tierra del Fuego continue to be sold to the state owned oil and gas company of Chile. Gabon Marketing -- Crude Oil. In Gabon plans are being finalized for crude oil delivery and sales systems. Crude will be transported on the Remboue River in barges for delivery to one of several existing marine terminals on the coast. Most Gabonese crude oil is exported to the United States and is priced with reference to Brent crude oil which is, on average, discounted at approximately U.S.$1.50 per barrel below the price of WTI crude. Canadian Marketing -- Natural Gas. Chauvco marketed an average of 40.4 million cubic feet of gas per day during 1996. The market mix between aggregator and direct sale volumes changed through the year as 18.0 million cubic feet per day of direct sale gas was added in June 1996 with the startup of Chauvco's Martin Creek pipeline in northeastern British Columbia which connects to the Westcoast system to deliver gas to the United States west coast market through Sumas, Washington. In addition, aggregator sales decreased with the disposition of several properties during the year. Chauvco currently owns approximately 20% in the Alliance Pipeline Project. Chauvco has committed to deliver natural gas for a 15-year period to the proposed pipeline which will run from northeastern British Columbia to Chicago. Applications for approval are now before Canadian and U.S. regulatory authorities. In December 1996, Chauvco began deliveries of 8.6 million cubic feet per day to an electric cogeneration facility in Ontario. The contract will run for 18 years and will price Chauvco's gas within a fixed narrow range that escalates over the term of the contract. The December 1996 price was C$2.22 per thousand cubic feet with future prices expected to be approximately C$0.42-C$0.63 per thousand cubic feet over current one year prices during 1997. Natural gas prices in North America were stronger in 1996 due to low storage levels, higher demand and colder weather. Gas demand strengthened in the western United States (California and the Pacific Northwest) during the latter part of the year due to low supplies of hydro-generated electricity, slightly colder weather and pipeline reversals away from California. Chauvco benefited from the price increases in the western United States due to its ability to deliver volumes to the west coast market at Sumas in Washington state. Alberta and British Columbia gas prices spiked at the end of 1996 in part due to weather, lower storage levels and pipeline volume curtailments. However, with no major pipeline expansions planned until 1998, Alberta prices are expected to return to lower levels. British Columbia prices, on the other hand, may continue at higher levels due to pipeline diversions affecting the California markets. Sixty-nine percent of Chauvco's gas sales incorporated market index pricing and 31% were based on fixed prices in 1996. Argentine Marketing -- Natural Gas. Prices for natural gas in Tierra del Fuego and the Neuquen basin are expected to increase marginally over 1996 levels. Natural gas, sold to distribution companies in Buenos Aires and Santa Cruz, is transported in the San Martin pipeline system. The pipeline for gas deliveries to Chile was completed in 1996. In January 1997 Chauvco and its partners in Tierra del Fuego initiated Argentina's first natural gas exports. These exports have been sourced from the expanded processing facility at San Sebastian. The contract of gas exports is to provide feedstock for a petrochemical plant for 25 years without seasonal throughput variations. 172 182 Business and Industry Risks Risks faced by participants in the oil and gas industry are those beyond the control of experience, knowledge and evaluation techniques. These risks include business, exploration, production, marketing, financial, environmental and safety risks as well as external factors such as fluctuating commodity prices, interest rates and foreign currency exchange rates. In addition, government involvement in the oil and gas industry is another external risk outside the control of Chauvco and other industry participants. Chauvco's core business activity includes the acquisition, exploration, development, production and marketing of crude oil and natural gas reserves both in Canada and internationally. Inherent in this activity is the uncertainty of finding new reserves which can be produced economically. External risk factors beyond Chauvco's control include commodity prices, interest rates and variations in the Canada-United States currency exchange rate, which in turn responds to economic and political circumstances throughout the world. Prices received by Chauvco for its Canadian and Argentine crude oil production are based on world crude oil prices adjusted for quality and transportation. World crude oil prices are based on global supply and demand conditions; the supply management practices of OPEC and other producing nations and the economic conditions of consuming regions. Natural gas prices respond to factors on a North American continental basis, including supply/demand fluctuations, transportation capacity, and contract terms and conditions. Over the last year, natural gas prices have shown significant increases in response to the combined effects of these price influences. In Argentina, natural gas prices were deregulated in 1994 but have remained relatively constant since then. All of these external factors impact on Chauvco's ability to maintain financial strength and liquidity. Chauvco's capital requirements are funded through cash flow, debt and equity, all of which are affected by the external factors. Therefore, Chauvco manages these risks by applying operational and financial strategies which maintain strict control over the use of debt and provide for a flexible capital budgeting process. In addition, Chauvco employs hedging strategies to reduce the effect on cash flow and earnings from changes in crude oil and natural gas prices, interest and foreign currency exchange rates. The possibility exists that exploration, development and production of oil and gas may damage the environment and cause personal injury to employees, contractors and the general public. To minimize the potential costs associated with these risks, Chauvco maintains safety and environmental protection programs and a comprehensive liability insurance program. Chauvco strives to continue its excellent record in conducting all of its operations in accordance with an environmental Code of Practice and current occupational health and safety regulations. GOVERNMENTAL AND ENVIRONMENTAL REGULATIONS Canadian The oil and natural gas industry is subject to extensive controls and regulations imposed by various levels of government. It is not expected that any of these controls or regulations will affect the operations of Chauvco in a manner materially different than they would affect other oil and gas companies of similar size. Pricing and Marketing -- Oil. In Canada, producers of oil negotiate sales contracts directly with oil purchasers, with the result that the market determines the price of oil. The price depends in part on oil quality, prices of competing fuels, distance to market and the value of refined products. Oil exports may be made pursuant to export contracts with terms not exceeding one year in the case of light crude, and not exceeding two years in the case of heavy crude, provided that an order approving any such export has been obtained from the National Energy Board ("NEB"). Any oil export to be made pursuant to a contract of longer duration requires an exporter to obtain an export license from the NEB and the issue of such a license requires the approval of the Governor in Council. 173 183 Pricing and Marketing --Natural Gas. In Canada the price of natural gas sold in interprovincial and international trade is determined by negotiation between buyers and sellers. Natural gas exported from Canada is subject to regulation by the NEB and the Government of Canada. Exporters are free to negotiate prices and other terms with purchasers, provided that the export contracts must continue to meet certain criteria prescribed by the NEB and the Government of Canada. As is the case with oil, natural gas exports for a term of less than two years must be made pursuant to an NEB order, or, in the case of exports for a longer duration, pursuant to an NEB license and Governor in Council approval. The governments of Alberta, British Columbia and Saskatchewan also regulate the volume of natural gas which may be removed from those provinces for consumption elsewhere based on such factors as reserve availability, transportation arrangements and market considerations. The North American Free Trade Agreement. On January 1, 1994 the North American Free Trade Agreement ("NAFTA") among the governments of Canada, the U.S. and Mexico became effective. The NAFTA carries forward most of the material energy terms contained in the Canada-US Free Trade Agreement. In the context of energy resources, Canada continues to remain free to determine whether exports to the U.S. or Mexico will be allowed provided that any export restrictions do not: (i) reduce the proportion of energy resource exported relative to domestic use, (ii) impose an export price higher than the domestic price, and (iii) disrupt normal channels of supply. All three countries are prohibited from imposing minimum export or import price requirements. The NAFTA contemplates the reduction of Mexican restrictive trade practices in the energy sector and prohibits discriminatory border restrictions and exports taxes. The agreement also contemplates clearer disciplines on regulations to ensure fair implementation of any regulatory changes and to minimize disruption of contractual arrangements, which is important for Canadian natural gas exports. Royalties and Incentives. In addition to federal regulation, each province has legislation and regulations which govern land tenure, royalties, production rates, environmental protection and other matters. The royalty regime is a significant factor in the profitability of oil and natural gas production. Royalties payable on productions from lands other than Crown lands are determined by negotiations between the mineral owner and the lessee. Crown royalties are determined by government regulation and are generally calculated as a percentage of the value of the gross production, and the rate of royalties payable generally depends in part on prescribed reference prices, well productivity, geographical location, field discovery date and the type or quality of the petroleum product produced. From time to time the governments of Canada, Alberta, British Columbia and Saskatchewan have established incentive programs which have included royalty rate reductions, royalty holidays and tax credits for the purpose of encouraging oil and natural gas exploration or enhanced planning projects. In Alberta, a producer of oil or natural gas is entitled to a credit against the royalties payable to the Crown by virtue of the Alberta royalty tax credit ("ARTC") program. The ARTC program is based on a price-sensitive formula, and the ARTC rate varies between 75%, at prices for oil below C$15.89 per barrel and 25%, at prices above C$33.37 per barrel. The ARTC rate is applied to maximum of C$2,000,000 of Alberta Crown royalties payable for each producer or associated group of producers. Crown royalties on production from producing properties acquired from corporations claiming maximum entitlement to ARTC will generally not be eligible for ARTC. The rate is established quarterly based on the average "par Price", as determined by Alberta Department of Energy for the previous quarterly period. Oil and natural gas royalty holidays and reductions for specific wells reduce the amount of Crown royalties paid by Chauvco to the provincial governments. The ARTC program provides a rebate on Crown royalties paid in respect of eligible producing properties. Both of these incentives increase the net income of Chauvco. 174 184 Producers of oil and natural gas in British Columbia are also required to pay annual rental payments in respect of Crown leases and royalties and freehold production taxes in respect of oil and gas produced from Crown and freehold lands respectively. The amount payable as a royalty in respect of oil depends on the vintage of the oil (whether it was produced from a pool discovered before or after October 31, 1975), the quantity of oil produced in a month and the value of the oil. Oil produced from newly discovered pools may be exempt from the payment of a royalty for the first 36 months of production. The royalty payable on natural gas is determined by a sliding scale based on a reference price which is the greater of the amount obtained by the producer and a (15% to 25%) prescribed minimum price. Gas produced in association with oil has a minimum royalty of 8% while the royalty in respect of other gas may not be less than 15%. Canadian Environmental Regulation. The oil and natural gas industry is currently subject to environmental regulation pursuant to provincial and federal legislation. Environmental legislation provides for restrictions and prohibitions on releases or emissions of various substances produced or utilized in association with certain oil and gas industry operations. In addition, legislation requires that well and facility sites be abandoned and reclaimed to the satisfaction of provincial authorities. A breach of such legislation may result in the imposition of fines and penalties. In Alberta, environmental compliance has been governed by the Alberta Environmental Protection and Enhancement Act ("AEPEA") since September 1, 1993. In addition to replacing a variety of older statutes which related to environmental matters, AEPEA also imposes certain new environmental responsibilities on oil and natural gas operators in Alberta and in certain instances also imposes greater penalties for violations. Chauvco is committed to meeting its responsibilities to protect the environment wherever it operates and anticipates making increased, although not material, expenditures of both a capital and expense nature as a result of the increasingly stringent laws relating to the protection of the environment. Argentina The oil and gas industry in Argentina has been deregulated for several years. Pricing and Marketing -- Crude Oil. Producers of crude oil negotiate sales contracts directly with oil refiners and other purchasers, with the result that the market determines the price of crude oil. Such price is generally linked to the WTI price and adjusted for oil quality, prices of competing oil, pipeline and other transportation costs to market and the value of refined products. Oil producers are entitled to enter into export contracts without obtaining governmental approval. Price and Marketing -- Natural Gas. The price of natural gas sold prior to 1994 had been regulated by the state with no free market in natural gas. The state natural gas entity, Gas del Estado, was privatized in late 1992 into two transmission companies ("Transcos") and eight regional distribution companies ("Distcos"). The privatization was followed by the deregulation of the wellhead price for natural gas effective January 1, 1994. The existing regulations are intended to allow free negotiation of prices between producers and Distcos and major industrial buyers, and for the staged release of capacity, if desired by the Distcos, on the transmission systems. Such a framework will allow the natural gas industry in Argentina to compete on a basis similar to that in North America. Exports of natural gas require the express approval of the executive power, upon the recommendation of the Energy Secretariat and ENARGAS, the regulatory agency to oversee the activities of the Transcos and Distcos. The Energy Secretariat must ensure that supply to the domestic market is not adversely affected by any export of natural gas. 175 185 Provincial Royalties. Each of the provinces in Argentina is entitled to a royalty, calculated as a percentage of the value of the gross production and is generally set at 12%. Certain deductions for transportation and processing are allowed from the gross revenues before royalty calculations. Turnover Tax. All provinces in Argentina have a turnover tax on gross sales with rates varying from 1% to 6%. During 1995, the Federal government and the provinces established a flat rate of 2% for oil and gas activities. Repatriation of Revenues. As a part of the deregulation of the oil and gas industry in Argentina, the government has decreed free access to foreign exchange from the sale of petroleum products produced in Argentina. Income Taxes and Dividend Withholding. Basic income taxes are levied at 30% of taxable income. Deductions for depletion and depreciation are allowed in calculating taxable income. No withholding taxes are payable on dividend distributions for Argentina. Within Argentina, Tierra del Fuego is subject to a preferential income tax rate status. EMPLOYEES Chauvco has experienced management, professional, technical and support staff in the exploration, land, production, drilling, engineering, marketing, financial, information systems and administration areas of responsibility. At December 31, 1996, Chauvco had 181 full-time employees as follows:
CANADA ARGENTINA TOTAL ------ --------- ----- Office.................................................... 93 29 122 Field..................................................... 38 21 59 --- -- --- 131 50 181 === == ===
176 186 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Pioneer Common Stock as of September 19, 1997 by (a) each person who is known by Pioneer to own beneficially more than 5% of the outstanding shares of Pioneer Common Stock, (b) each director of Pioneer, (c) each executive officer of Pioneer and (d) all Pioneer directors and executive officers as a group.
PERCENT OF CLASS NAME OF PERSON NUMBER OF PERCENT AFTER OR IDENTITY OF GROUP SHARES OF CLASS TRANSACTION(1) -------------------- ---------- -------- -------------- DNR-Mesa Holdings, L.P.(2).................................. 11,370,165 15.31% 11.75% 777 Main Street, Suite 2700 Fort Worth, Texas 76102 The Prudential Insurance Company of America(3).............. 6,958,961 9.37% 7.19% 751 Broad Street Newark, New Jersey 07102-3777 I. Jon Brumley(4)........................................... 287,571 * * Scott D. Sheffield(5)....................................... 542,321 * * Timothy L. Dove............................................. 90,328 * * Dennis E. Fagerstone........................................ 108,142 * * Mel H. Fischer(6)........................................... 51,964 * * Mark L. Withrow............................................. 97,007 * * Lon C. Kile................................................. 117,898 * * M. Garrett Smith............................................ 74,286 * * R. Hartwell Gardner......................................... 10,298 * * John S. Herrington.......................................... 5,107 * * Kenneth A. Hersh............................................ 4,479 * * James L. Houghton(7)........................................ 12,545 * * Jerry P. Jones.............................................. 14,457 * * Boone Pickens(8)............................................ 766,781 1.03% * Richard E. Rainwater(2)..................................... 11,370,548 15.32% 11.75% Charles E. Ramsey, Jr. ..................................... 16,141 * * Arthur L. Smith............................................. 9,132 * * Philip B. Smith............................................. 479 * * Robert L. Stillwell(9)...................................... 5,771 * * Michael D. Wortley.......................................... 6,623 * * All directors and executive officers as a group (20 persons).................................................. 13,591,879 18.09% 13.92%
- --------------- * Does not exceed 1%. (1) Assumes all Exchangeable Shares have been exchanged for Pioneer Common Stock. (2) Mr. Rainwater is the sole shareholder and President of Rainwater, Inc. and the sole general partner of DNR and, as such, may be deemed to beneficially own the shares of stock held by DNR. (3) The Schedule 13G filed with the SEC on September 10, 1997 states that The Prudential Insurance Company of America ("Prudential") holds 92,800 shares or 0.1% of Pioneer Common Stock for the benefit of its general account and that it may have voting and/or investment discretion over 6,866,161 shares or 9.2% of Pioneer Common Stock held for the benefit of its clients by its separate accounts, externally managed accounts, registered investment companies, subsidiaries and/or other affiliates. 177 187 (4) Mr. Brumley is a general partner of Brumley Partners, a Texas general partnership and a limited partner of DNR. Mr. Brumley disclaims beneficial ownership of any of the shares of stock held by DNR. (5) Includes 100 shares held by a minor child of Mr. Sheffield. (6) Includes 550 shares held in an IRA account by Mr. Fischer. (7) Includes 4,004 shares held by Mr. Houghton's wife. (8) Includes shares of Pioneer Common Stock owned by several trusts for Mr. Pickens' children of which he is a trustee, and over which shares he has sole voting and investment power, although he has no economic interest therein. Excludes shares of Pioneer Common Stock owned by Mrs. Pickens as her separate property, as to which Mr. Pickens disclaims beneficial ownership and with respect to which he does not have or share voting or investment power. (9) Includes 757 shares held by Mr. Stillwell's wife. COMPARISON OF STOCKHOLDER RIGHTS In the event that the Transaction is consummated, Chauvco Shareholders will, at the Effective Time, have their Chauvco Common Shares transferred to Pioneer Canada for CRI Shares and either shares of Pioneer Common Stock or Exchangeable Shares or a combination thereof. Exchangeable Shares are the economic equivalent of Pioneer Common Stock. Holders of Exchangeable Shares will have the right to retract the Exchangeable Shares for an equivalent number of shares of Pioneer Common Stock. Pioneer is a corporation organized under the DGCL. While the rights and privileges of shareholders of an Alberta corporation are, in many instances, comparable to those of stockholders of a Delaware corporation, there are certain differences. These differences arise from differences between Alberta and Delaware law, between the ABCA and DGCL and between the Chauvco Articles and Chauvco Bylaws and the Pioneer Restated Certificate and Pioneer Bylaws. For a description of the respective rights of the holders of Chauvco Common Shares and Pioneer Common Stock, see respectively, "Description of Capital Stock -- Chauvco Share Capital" and "-- Pioneer Capital Stock." VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS Under the ABCA, certain extraordinary corporate actions, such as certain amalgamations, continuances, and sales, leases or exchanges of all or substantially all the property of a corporation other than in the ordinary course of business, and other extraordinary corporate actions such as liquidations, dissolutions and (if ordered by a court) arrangements, are required to be approved by special resolution. A special resolution is a resolution passed at a meeting by not less than two-thirds of the votes cast by the shareholders, present in person or by proxy, at the meeting. In certain cases, a special resolution to approve an extraordinary corporate action is also required to be approved separately by the holders of a class or series of shares. The DGCL requires the affirmative vote of a majority of the outstanding stock entitled to vote thereon to authorize any merger, consolidation, dissolution or sale of substantially all of the assets of a corporation, except that, unless required by its certificate of incorporation, (a) no authorizing stockholder vote is required of a corporation surviving a merger if (i) such corporation's certificate of incorporation is not amended by the merger, (ii) each share of stock of such corporation will be an identical share of the surviving corporation after the merger, and (iii) the number of shares to be issued in the merger does not exceed 20% of such corporation's outstanding common stock immediately prior to the effective date of the merger; and (b) no authorizing stockholder vote is required of a corporation to authorize a merger with or into a single direct or indirect wholly-owned subsidiary of such corporation (provided certain other limited circumstances apply). The Pioneer Restated Certificate provides that certain business combinations (including mergers and sales of all or substantially all of the assets of Pioneer) involving a beneficial owner of at least 10% of the outstanding shares of Pioneer's capital stock (a "Pioneer Related Person") require the affirmative vote of the holders of at least 80% of the outstanding voting stock of Pioneer as well as two-thirds of the outstanding shares of capital stock held by stockholders other than the Pioneer Related Person, unless certain minimum price or board approval requirements are met. See " -- Anti-Takeover Provisions and Interested Stockholder Transactions." 178 188 Stockholder approval is also not required under the DGCL for mergers or consolidations in which a parent corporation merges or consolidates with a subsidiary of which it owns at least 90% of the outstanding shares of each class of stock. Such matters as take-over bids, issuer bids or self tenders, going-private transactions and transactions with directors, officers, significant shareholders and other related parties to which Pioneer is a party will be subject to regulation by Canadian provincial securities legislation and administrative policies of Canadian securities administrators. Similar matters to which Pioneer is a party will be subject to regulation under U.S. federal securities laws, regulations and policies. AMENDMENT TO GOVERNING DOCUMENTS Under the ABCA, any amendment to the articles generally requires approval by special resolution, which is a resolution passed by a majority of not less than two-thirds of the votes cast by shareholders entitled to vote on the resolution. The ABCA provides that unless the articles or by-laws otherwise provide, the directors may, by resolution, make, amend or repeal any by-laws that regulate the business or affairs of a corporation. Where the directors make, amend or repeal a by-law, they are required under the ABCA to submit the by-law, amendment or repeal to the shareholders at the next meeting of shareholders, and the shareholders may confirm, reject or amend the by-law, amendment or repeal by an ordinary resolution, which is a resolution passed by a majority of the votes cast by shareholders entitled to vote on the resolution. The DGCL requires a vote of the corporation's board of directors followed by the affirmative vote of a majority of the outstanding stock entitled to vote for any amendment to the certificate of incorporation, unless a greater level of approval is required by the certificate of incorporation. The Pioneer Restated Certificate provides that (i) amendments to certain provisions regarding (A) election, removal and replacement of directors and provision for a staggered board, (B) amendment of the Pioneer Bylaws, (C) appointment or removal of officers and members of committees of the Pioneer Board, and (D) matters relating to special meetings of stockholders must be approved by the affirmative vote of at least two-thirds of the outstanding shares of capital stock, (ii) amendments to certain provisions relating to denial of written consent rights to stockholders must be approved by the affirmative vote of at least 80% of the outstanding shares of capital stock, and (iii) amendments to certain provisions relating to certain business combinations must be approved by the affirmative vote of at least 80% of the outstanding shares of capital stock and by the affirmative vote of holders of at least two-thirds of the outstanding shares of voting stock held by stockholders other than the Pioneer Related Person. The DGCL also states that the power to adopt, amend or repeal the by-laws of a corporation shall be in the stockholders entitled to vote, provided that the corporation in its certificate of incorporation may confer such power on the corporation's board of directors. The Pioneer Restated Certificate provides that the Pioneer Board may alter, amend or repeal the Pioneer Bylaws. The Pioneer Bylaws may also be altered, amended or repealed by the holders of not less than two-thirds of the outstanding shares of stock then entitled to vote upon an election of directors at any regular meeting of the stockholders or at any special meeting of the stockholders if notice of such alteration, amendment, repeal or adoption of new bylaws is contained in the notice of such special meeting. DISSENTERS' RIGHTS The ABCA provides that shareholders of an Alberta corporation entitled to vote on certain matters are entitled to exercise dissent rights and to be paid the fair value of their shares in connection therewith. The ABCA does not distinguish for this purpose between listed and unlisted shares. Such matters include: (a) any amalgamation with another corporation (other than with certain affiliated corporations); (b) an amendment to the corporation's articles to add, change or remove any provisions restricting or constraining the issue or transfer of shares; (c) an amendment to the corporation's articles to add, change or remove any restriction upon the business or businesses that the corporation may carry on; (d) a continuance under the laws of another jurisdiction; (e) a sale, lease or exchange of all or substantially all the property of the corporation other than in the ordinary course of business; (f) a court order permitting a shareholder to dissent in connection with an application to the court for an order approving an arrangement proposed by the corporation; or (g) certain amendments to the articles of a corporation which require a separate class or series 179 189 vote, provided that a shareholder is not entitled to dissent if an amendment to the articles is effected by a court order approving a reorganization or by a court order made in connection with an action for an oppression remedy. Under the ABCA, a shareholder may, in addition to exercising dissent rights, seek an oppression remedy for any act or omission of a corporation or any of its affiliates which is oppressive, unfairly prejudicial to or that unfairly disregards a shareholder's interest. Under the DGCL, holders of shares of any class or series have the right, in certain circumstances, to dissent from a merger or consolidation by demanding payment in cash for their shares equal to the fair value (excluding any appreciation or depreciation as a consequence or in expectation of the transaction) of such shares, as determined by agreement with the corporation or by an independent appraiser appointed by a court in an action timely brought by the corporation or the dissenters. The DGCL grants dissenters' appraisal rights only in the case of mergers or consolidations and not in the case of a sale or transfer of assets or a purchase of assets for stock regardless of the number of shares being issued. Further, no appraisal rights are available for shares of any class or series listed on a national securities exchange or designated as a national market system security on Nasdaq or held of record by more than 2,000 stockholders, unless the agreement of merger or consolidation converts such shares into anything other than (a) stock of the surviving corporation, (b) stock of another corporation which is either listed on a national securities exchange or designated as a national market system security on Nasdaq or held of record by more than 2,000 stockholders, (c) cash in lieu of fractional shares, or (d) some combination of the above. OPPRESSION REMEDY The ABCA provides an oppression remedy that enables the court to make any order, both interim and final, to rectify the matters complained of, if the court is satisfied upon application by a complainant (as defined below) that: (i) any act or omission of the corporation or an affiliate effects a result; (ii) the business or affairs of the corporation or an affiliate are or have been carried on or conducted in a manner; or (iii) the powers of the directors of the corporation or of an affiliate are or have been exercised in a manner, that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer. A complainant includes: (a) a present or former registered holder or beneficial owner of securities of a corporation or any of its affiliates; (b) a present or former director or officer of the corporation or any of its affiliates; and (c) any other person who in the discretion of the court is a proper person to make such application. Because of the breadth of the conduct which can be complained of and the scope of the court's remedial powers, the oppression remedy is very flexible and is sometimes relied upon to safeguard the interests of shareholders and other complainants with a substantial interest in the corporation. Under the ABCA, it is not necessary to prove that the directors of a corporation acted in bad faith in order to seek an oppression remedy. Furthermore, the court may order the corporation to pay the interim expenses of a complainant seeking an oppression remedy, but the complainant may be held accountable for such interim costs on final disposition of the complaint. The DGCL does not provide for a similar remedy. DERIVATIVE ACTION Derivative actions may be brought in Delaware by a stockholder on behalf of, and for the benefit of, the corporation. The DGCL provides that a stockholder must aver in the complaint that he or she was a stockholder of the corporation at the time of the transaction of which he or she complains or that his or her stock thereafter devolved upon him or her by operation of law. A stockholder may not sue derivatively unless he or she first makes demand on the corporation that it bring suit and such demand has been refused, unless it is shown that such demand would have been futile. Under the ABCA, a complainant may apply to the court for leave to bring an action in the name of and on behalf of a corporation or any subsidiary, or to intervene in an existing action to which any such body corporate is a party, for the purpose of prosecuting, defending or discontinuing the action on behalf of the body corporate or subsidiary. Under the ABCA, no action may be brought and no intervention in an action may be made unless the complainant has given reasonable notice to the directors of the corporation or its subsidiary of 180 190 the complainant's intention to apply to the court and the court is satisfied that: (a) the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action; (b) the complainant is acting in good faith; and (c) it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued. Under the ABCA, the court in a derivative action may make any order it thinks fit. Additionally, under the ABCA, a court may order a corporation or its subsidiary to pay the complainant's reasonable legal fees. SHAREHOLDER CONSENT IN LIEU OF MEETING Under the DGCL, unless otherwise provided in the certificate of incorporation, any action required to be taken or which may be taken at an annual or special meeting of stockholders may be taken without a meeting if a consent in writing is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize such action at a meeting at which all shares entitled to vote were present and voted. The Pioneer Restated Certificate denies action by written consent of holders of common stock. Under the ABCA, shareholder action without a meeting may only be taken by written resolution signed by all shareholders who would be entitled to vote thereon at a meeting. DIRECTOR QUALIFICATIONS At least half of the directors of an ABCA corporation generally must be resident Canadians. The ABCA also requires that a corporation whose securities are publicly traded must have not fewer than three directors, at least two of whom are not officers or employees of the corporation or any of its affiliates. The DGCL does not have comparable requirements. FIDUCIARY DUTIES OF DIRECTORS Directors of corporations governed by the ABCA have fiduciary obligations to the corporation. Directors of corporations incorporated or organized under the DGCL have fiduciary obligations to the corporation and its shareholders. Pursuant to these fiduciary obligations, the directors must act in accordance with the so-called duties of "due care" and "loyalty". Under the DGCL, the duty of care requires that the directors act in an informed and deliberative manner and to inform themselves, prior to making a business decision, of all material information reasonably available to them. The duty of loyalty must be summarized as the duty to act in good faith in a manner which the directors reasonably believe to be in the best interests of the stockholders. It requires that there be no conflict between duty and self-interest. Under the ABCA, the duty of loyalty requires directors of an Alberta corporation to act honestly and in good faith with a view to the best interests of the corporation, and the duty of care requires that the directors exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. INDEMNIFICATION OF OFFICERS AND DIRECTORS Under the ABCA, except in respect of an action by or on behalf of a corporation or a body corporate to procure a judgment in its favor, a corporation may indemnify a director or officer, a former director or officer or a person who acts or acted at the corporation's request as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor, and his or her heirs and legal representatives (an "Indemnifiable Person"), against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of such corporation or such body corporate, if: (a) he or she acted honestly and in good faith with a view to the best interests of such corporation; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he or she had reasonable grounds for believing that his or her conduct was lawful. An Indemnifiable Person is entitled to such indemnity from the corporation if he or she was substantially successful on the merits in his or her defense of the action or proceeding, fulfilled the conditions set out in (a) and (b), above and is fairly and reasonably entitled to indemnity. A corporation may, with the 181 191 approval of a court, also indemnify an Indemnifiable Person in respect of an action by or on behalf of the corporation or body corporate to procure a judgment in its favor, to which such person is made a party by reason of being or having been a director or an officer of the corporation or body corporate, if he or she fulfills the conditions set out in (a) and (b), above. The Chauvco Bylaws provide for indemnification of directors and officers in accordance with the provisions of the ABCA. The DGCL provides that a corporation may indemnify its present and former directors, officers, employees and agents (each, an "indemnitee") against all reasonable expenses (including attorneys' fees) and, except in actions initiated by or in the right of the corporation, against all judgments, fines and amounts paid in settlement in actions brought against them, if such individual acted in good faith and in a manner which he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The corporation shall indemnify an indemnitee to the extent that he or she is successful on the merits or otherwise in the defense of any claim, issue or matter associated with an action. The Pioneer Restated Certificate provides for indemnification of directors and officers to the fullest extent authorized by the DGCL. The DGCL allows for the advance payment of an indemnitee's expenses prior to the final disposition of an action, provided that the indemnitee undertakes to repay any such amount advanced if it is later determined that the indemnitee is not entitled to indemnification with regard to the action for which the expenses were advanced. Neither the ABCA nor the Chauvco Bylaws expressly provides for such advance payment. Pioneer has entered into Indemnity Agreements with each of its directors and executive officers. DIRECTOR LIABILITY The DGCL provides that the charter of a corporation may include a provision which limits or eliminates the liability of directors to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided such liability does not arise from certain proscribed conduct, including acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law. The Pioneer Restated Certificate contains a provision limiting the liability of its directors to the fullest extent permitted by the DGCL. The ABCA does not permit any such limitation of a director's liability. ANTI-TAKEOVER PROVISIONS AND INTERESTED STOCKHOLDER TRANSACTIONS Section 203 of the DGCL, in general, prohibits a "business combination" between a corporation and an "interested stockholder" within three years of the time such stockholder became an "interested stockholder" unless (i) prior to such time the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, exclusive of shares owned by directors who are also officers and by certain employee stock plans, or (iii) after such time, the business combination is approved by the board of directors and authorized by the affirmative vote at a stockholders' meeting of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. The term "business combination" is defined to include, among other transactions between the interested stockholder and the corporation or any direct or indirect majority-owned subsidiary thereof, a merger or consolidation, a sale, pledge, transfer or other disposition (including as part of a dissolution) of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation; certain transactions that would increase the interested stockholder's proportionate share ownership of the stock of any class or series of the corporation or such subsidiary; and any receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges of other financial benefits provided by or through the corporation or any such subsidiary. In general, and subject to certain exceptions, an "interested stockholder" is any person who is the owner of 15% or more of the outstanding voting stock (or, in the case of a corporation with classes of voting stock with 182 192 disparate voting power, 15% or more of the voting power of the outstanding voting stock) of the corporation, and the affiliates and associates of such person. The term "owner" is broadly defined to include any person that individually or with or through his or its affiliates or associates, among other things, beneficially owns such stock, or has the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement or understanding or upon the exercise of warrants or options or otherwise or has the right to vote such stock pursuant to any agreement or understanding, or has an agreement or understanding with the beneficial owner of such stock for the purpose of acquiring, holding, voting or disposing of such stock. The restrictions of Section 203 or the DGCL do not apply to corporations that have elected, in the manner provided therein, not to be subject to such section or which do not have a class of voting stock that is listed on a national securities exchange or authorized for quotation on an interdealer quotation system of a registered national securities association or held of record by more than 2,000 stockholders. The Pioneer Restated Certificate contains a "fair price" provision that applies to certain business combination transactions involving any Pioneer Related Person. The "fair price" provision requires the affirmative vote of the holders of (i) at least 80% of the voting stock of Pioneer and (ii) at least 66 2/3% of the voting stock of Pioneer not beneficially owned by the Pioneer Related Person, to approve certain transactions between the Pioneer Related Person and Pioneer or its subsidiaries, including any merger, consolidation or share exchange, any sale, lease, exchange, pledge or other disposition of assets of Pioneer or its subsidiaries having a fair market value of at least $10 million, any transfer or issuance of securities of Pioneer or any of its subsidiaries, any adoption of a plan or proposal by Pioneer of voluntary liquation or dissolution of Pioneer, certain reclassifications of securities or recapitalizations of Pioneer or certain other transactions, in each case involving the Pioneer Related Person. This voting requirement does not apply to certain transactions, including (a) any transaction in which the consideration to be received by the holders of each class of capital stock of Pioneer is (x) the same in form and amount as that paid in a tender offer in which the Pioneer Related Person acquired at least 50% of the outstanding shares of such class and which was consummated not more than one year earlier or (y) not less in amount than the highest per share price paid by the Pioneer Related Person for shares of such class or (b) any transaction approved by Pioneer's continuing directors (as defined in the Pioneer Restated Certificate). As a Delaware corporation, Pioneer is subject to Section 203 of the DGCL as described above. The Pioneer Restated Certificate does not contain any provision electing out of the application of Section 203 of the DGCL, and Pioneer has not taken any of the actions necessary for it to elect out of such provision. As a result, the provisions of Section 203 will remain applicable to transactions between Pioneer and any of their respective "interested stockholders." The ABCA does not contain a comparable provision with respect to business combinations. However, policies of certain Canadian securities regulatory authorities, including Policy 9.1 of the Ontario Securities Commission ("Policy 9.1"), contain requirements in connection with related party transactions. A related party transaction means, generally, any transaction by which an issuer, directly or indirectly, acquires or transfers an asset or acquires or issues treasury securities or assumes or transfers a liability from or to, as the case may be, a related party by any means in any one or any combination of transactions. "Related party" is defined in Policy 9.1 and includes directors, senior officers and holders of at least 10% of the voting securities of the issuer. Policy 9.1 requires more detailed disclosure in the proxy material sent to security holders in connection with a related party transaction, and, subject to certain exceptions, the preparation of a formal valuation of the subject matter of the related party transaction and any non-cash consideration offered therefor and the inclusion of a summary of the valuation in the proxy material. Policy 9.1 also requires, subject to certain exceptions, that the minority shareholders of the issuer separately approve the transaction, by either a simple majority or two-thirds of the votes cast, depending on the circumstances. 183 193 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Pioneer consists of 500,000,000 shares of common stock, par value $.01 per share, and 100,000,000 shares of preferred stock, par value $.01 per share, of which one share has been designated as the Special Preferred Voting Share. PIONEER CAPITAL STOCK Pioneer Common Stock All shares of Pioneer Common Stock issued in the Transaction will be fully paid and nonassessable. The holders of Pioneer Common Stock are entitled to one vote for each share held on all matters submitted to a vote of common stockholders. The Pioneer Common Stock does not have cumulative voting rights. Shares of Pioneer Common Stock have no preemptive rights, conversion rights, redemption rights or sinking fund provisions. Pioneer Common Stock is not subject to redemption by Pioneer. Subject to the rights of the holders of any class of capital stock of Pioneer having any preference or priority over the Pioneer Common Stock, the holders of Pioneer Common Stock are entitled to dividends in such amounts as may be declared by the Pioneer Board from time to time out of funds legally available for such payments and, in the event of liquidation, to share ratably in any assets of Pioneer remaining after payment in full of all creditors and provision for any liquidation preferences on any outstanding preferred stock ranking prior to the Pioneer Common Stock. Pioneer Preferred Stock The Pioneer Board, without further stockholder action, is authorized to issue up to 100,000,000 shares of preferred stock in one or more series and to fix and determine as to any series all the relative rights and preferences of shares in the series, including voting rights, dividend rights, liquidation preferences, terms of redemption, and conversion rights. Pioneer Special Preferred Voting Stock The Pioneer Board has designated one (1) of the 100,000,000 authorized shares of preferred stock as Special Preferred Voting Stock, par value $.01 per share (the "Voting Share"). The Trustee shall hold such Voting Share as trustee for and on behalf of, and for the use and benefit of, the holders of Exchangeable Shares and in accordance with the Voting and Exchange Trust Agreement. The Certificate of Designations for the Voting Share includes the following principal terms: Dividends. No dividend shall be paid to the Trustee, as the holder of the Voting Share. Voting Rights. The Trustee, as the holder of record of the Voting Share, shall be entitled to all of the voting rights attached to the Voting Share, including the right to consent to or vote in person or by proxy the Voting Share, on any matter, question or proposition whatsoever that may properly come before the Pioneer stockholders at a meeting thereof or with respect to any written consent sought by Pioneer from its stockholders. For each Exchangeable Share owned of record on the relevant record date, the holder thereof shall be entitled to instruct the Trustee to cast and exercise, in the manner instructed, a number of votes (including for purposes of a quorum) equal to the number of votes to which a holder of one share of Pioneer Common Stock is entitled with respect to any matter, proposition or question on which the holders of Pioneer Common Stock are entitled to vote (the "Equivalent Vote Amount"). Except as otherwise described herein or required by law, the holder of the Voting Share will vote together with the Pioneer Common Stock as a single class and not as a separate class or series apart therefrom, including any vote to approve or adopt:(i) any plan of merger, consolidation or share exchange for which Delaware law requires a stockholder vote; (ii) any disposition of assets for which Delaware law requires a stockholder vote; and (iii) any dissolution of Pioneer for which Delaware law requires a stockholder vote. 184 194 So long as any Exchangeable Shares are outstanding, the number of shares comprising the Special Preferred Voting Stock will not be increased or decreased and no other term of the Special Preferred Voting Stock may be amended, except upon the approval of the holder of the Voting Share. Conversion. The Voting Share is not convertible into any other class or series of the capital stock of Pioneer or into cash, property or other rights. Redemption. The Voting Share may not be redeemed, except at such time as no Exchangeable Shares shall be outstanding, in which case, the Voting Share shall be automatically redeemed. The redemption price due and payable upon such automatic redemption will be equal to a $1.00 liquidation preference. The Voting Share will be deemed retired and will be cancelled upon any purchase or other acquisition thereof by Pioneer. After such cancellation, the Voting Share may not be reissued or otherwise disposed of by Pioneer. Liquidation. The Voting Share will rank prior to each share of Pioneer Common Stock with respect to the distribution of assets upon a liquidation, dissolution or winding-up of Pioneer. In the event of any such liquidation, dissolution or winding-up, the holder of the Voting Share will be entitled to receive, before any distribution to the holders of Pioneer Common Stock, but only after the liquidation preference of any other shares of preferred stock of Pioneer has been paid in full, a liquidation preference equal to $1.00. Certain Covenants of Pioneer. For so long as the Voting Share is outstanding, Pioneer will: (i) fully comply with all terms of the Exchangeable Shares and with all contractual obligations of Pioneer associated therewith, and (ii) not amend, alter or repeal the terms and conditions of the Special Preferred Voting Stock, except with the approval of the holder of the Voting Share. For a more detailed description of Pioneer's Special Preferred Voting Stock and the Voting Share, see the terms and conditions thereof set forth on Annex G hereto. See also " -- Voting and Exchange Trust Agreement." Certain Provisions of the Certificate of Incorporation and Bylaws The Pioneer Board is divided into three classes. The directors of each class are elected for three-year terms, with the terms of the three classes staggered so that directors from a single class are elected at each annual meeting of stockholders. Stockholders may remove a director only for cause. In general, the Pioneer Board, not the stockholders, has the right to appoint persons to fill vacancies on the Pioneer Board. The Pioneer Restated Certificate contains a "fair price" provision that requires the affirmative vote of the holders of least 80% of Pioneer's voting stock and the affirmative vote of at least 66 2/3% of Pioneer's voting stock not owned, directly or indirectly, by a Pioneer Related Person to approve any merger, consolidation, sale or lease of all or substantially all of Pioneer's assets, or certain other transactions involving a Pioneer Related Person. For purposes of this fair price provision, a "Pioneer Related Person" is any person beneficially owning 10% or more of the voting power of the outstanding capital stock of Pioneer who is a party to the transaction at issue. The voting requirement is not applicable to certain transactions, including those that are approved by Pioneer's Continuing Directors (as defined in the Pioneer Restated Certificate) or that meet certain "fair price" criteria contained in the Pioneer Restated Certificate. See "Comparison of Stockholder Rights -- Anti-Takeover Provisions and Interested Stockholder Transactions." The Pioneer Restated Certificate further provides that stockholders may act only at annual or special meetings of stockholders and not by written consent, that special meetings of stockholders may be called only by the Pioneer Board and that only business proposed by the Pioneer Board may be considered at special meetings of stockholders. The Pioneer Restated Certificate also provides that the only business (including election of directors) that may be considered at an annual meeting of stockholders, in addition to business proposed (or persons nominated to be directors) by the directors of Pioneer, is business proposed (or persons nominated to be directors) by stockholders who comply with the notice and disclosure requirements set forth in the Pioneer Restated Certificate. In general, the Pioneer Restated Certificate requires that a stockholder give Pioneer notice of proposed business or nominations no later than 60 days before the annual meeting of stockholders 185 195 (meaning the date on which the meeting is first scheduled and not postponements or adjournments thereof) or (if later) 10 days after the first public notice of the annual meeting is sent to common stockholders. In general, the notice must also contain information about the stockholder proposing the business or nomination, his interest in the business, and (with respect to nominations for director) information about the nominee of the nature ordinarily required to be disclosed in public proxy solicitations. The stockholder also must submit a notarized letter from each of his nominees stating the nominee's acceptance of the nomination and indicating the nominee's intention to serve as director if elected. The Pioneer Restated Certificate also restricts the ability of stockholders to interfere with the powers of the Board of Directors in certain specified ways, including the constitution and composition of committees and the election and removal of officers. The Pioneer Restated Certificate provides that approval by the holders of at least 66 2/3% of the outstanding Pioneer voting stock is required to amend the provisions of the Certificate of Incorporation discussed above and certain other provisions, except that (a) approval by the holders of at least 80% of the outstanding Pioneer voting stock, together with approval by the holders of at least 66 2/3% of the outstanding voting stock not owned, directly or indirectly, by the Related Person, is required to amend the fair price provisions and (b) approval of the holders of at least 80% of the outstanding voting stock is required to amend the provisions prohibiting stockholders from acting by written consent. Delaware Anti-Takeover Statute Pioneer is a Delaware corporation and is subject to Section 203 of the DGCL. In general, Section 203 prevents an "interested stockholder" (defined generally as a person owning 15% or more of Pioneer's outstanding voting stock) from engaging in a "business combination" (as defined in Section 203) with Pioneer for three years following the date that person becomes an interested stockholder unless (a) before that person became an interested stockholder, the Pioneer Board approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination, (b) upon completion of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owns at least 85% of Pioneer voting stock outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of Pioneer and by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer), or (c) following the transaction in which that person became an interested stockholder, the business combination is approved by the Pioneer Board and authorized at a meeting of stockholders by the affirmative vote of the holders of at least two-thirds of the outstanding Pioneer voting stock not owned by the interested stockholder. Under Section 203, these restrictions also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one or certain extraordinary transactions involving Pioneer and a person who was not an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of Pioneer's directors, if that extraordinary transaction is approved or not opposed by a majority of the directors before any person became an interested stockholder in the previous three years or who were recommended for election or elected to succeed such directors by a majority of such directors then in office. CHAUVCO SHARE CAPITAL In the event of the consummation of the Transaction, the share capital of Chauvco after the Effective Time will consist of one class of common shares, unlimited in number, and all of such shares which are issued and outstanding shall be held by Pioneer Canada; PIONEER CANADA SHARE CAPITAL In the event of the consummation of the Transaction, the share capital of Pioneer Canada after the Effective Time will have the rights and preferences summarized below. Such summary is qualified in its 186 196 entirety by reference to the Plan of Arrangement and the Exchangeable Share Provisions which are attached as Annexes E and F hereto, respectively. Pioneer Canada Common Voting Shares. The holders of Pioneer Canada Common Voting Shares will be entitled to receive notice of and to attend all meetings of the shareholders of Pioneer Canada and will be entitled to one vote for each share held of record on all matters submitted to a vote of holders of Pioneer Canada Common Voting Shares. The holders of Pioneer Canada Common Voting Shares will be entitled to receive such dividends as may be declared by the Pioneer Canada board of directors out of funds legally available therefor. Holders of Pioneer Canada Common Voting Shares will be entitled upon any liquidation, dissolution or winding-up of Pioneer Canada, subject to the prior rights of the holders of the Exchangeable Shares and to any other shares ranking senior to the Pioneer Canada Common Voting Shares, to receive the remaining property and assets of Pioneer Canada. Exchangeable Shares of Pioneer Canada Ranking. The Exchangeable Shares will rank prior to the Pioneer Canada Common Voting Shares and any other shares ranking junior to the Exchangeable Shares with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of Pioneer Canada. Dividends. Holders of Exchangeable Shares will be entitled to receive dividends equivalent to dividends paid from time to time by Pioneer on shares of Pioneer Common Stock. The declaration date, record date and payment date for dividends on the Exchangeable Shares will be the same as that for the corresponding dividends on the Pioneer Common Stock. Certain Restrictions. Without the approval of the holders of the Exchangeable Shares, Pioneer Canada will not: (a) pay any dividend on the Pioneer Canada Common Voting Shares, or any other shares ranking junior to the Exchangeable Shares, other than stock dividends payable in such other shares ranking junior to the Exchangeable Shares; (b) redeem, purchase or make any capital distribution in respect of Pioneer Canada Common Voting Shares or any other shares ranking junior to the Exchangeable Shares; (c) redeem or purchase any other shares of Pioneer Canada ranking equally with the Exchangeable Shares with respect to the payment of dividends or on any liquidation distribution; (d) issue any Exchangeable Shares or any other shares of Pioneer Canada ranking equally with, or superior to, the Exchangeable Shares other than by stock dividends to the holders of the Exchangeable Shares or as contemplated in the Support Agreement; or (e) amend the articles or bylaws of Pioneer Canada. The restrictions in (a), (b) and (c) above will not apply at any time when the dividends on the outstanding Exchangeable Shares corresponding to dividends declared on the Pioneer Common Stock have been declared and paid in full. Liquidation. In the event of the liquidation, dissolution or winding-up of Pioneer Canada a holder of Exchangeable Shares will be entitled to receive for each Exchangeable Share one share of Pioneer Common Stock, together with a cash amount equivalent to the full amount of all unpaid dividends on the Exchangeable Shares. See "-- Voting and Exchange Trust Agreement." Retraction of Exchangeable Shares by Holders. A holder of Exchangeable Shares will be entitled at any time to require Pioneer Canada to retract (i.e., require Pioneer Canada to redeem) any or all of the Exchangeable Shares held by such holder for one share of Pioneer Common Stock for each Exchangeable Share plus an additional amount equivalent to the full amount of all unpaid dividends thereon, which shall be delivered to the retracting holder on the retraction date specified by the holder (which shall not be less than three nor more than ten business days after the date on which Pioneer Canada receives the retraction request from the holder). 187 197 If, as a result of liquidity or solvency provisions of applicable law, Pioneer Canada is not permitted to redeem all Exchangeable Shares tendered by a retracting holder, Pioneer Canada will redeem only those Exchangeable Shares tendered by the holder (rounded down to a whole number of shares) as would not be contrary to such provisions of applicable law. The holder of any Exchangeable Shares not redeemed by Pioneer Canada will be deemed to have required Pioneer to purchase such unretracted shares in exchange for Pioneer Common Stock, plus an additional amount equivalent to the full amount of all unpaid dividends thereon, on the retraction date pursuant to the optional Exchange Rights. See "-- Voting and Exchange Trust Agreement." Redemption of Exchangeable Shares. On the Automatic Redemption Date Pioneer Canada will redeem all but not less than all of the then outstanding Exchangeable Shares for one share of Pioneer Common Stock for each Exchangeable Share plus an additional amount equivalent to the full amount of all unpaid dividends thereon. Pioneer Canada shall, at least 120 days prior to the Automatic Redemption Date, provide the registered holders of the Exchangeable Shares with written notice of the proposed redemption of the Exchangeable Shares. Voting Rights. Except as required by applicable law, the holders of the Exchangeable Shares shall not be entitled as such to receive notice of or attend any meeting of the shareholders of Pioneer Canada or to vote at any such meeting. Amendment and Approval. The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares may be changed only with the approval of the holders thereof. Any such approval or any other approval or consent to be given by the holders of the Exchangeable Shares will be sufficiently given if given in accordance with applicable law and subject to a minimum requirement that such approval or consent be evidenced by a resolution passed by not less than two-thirds of the votes cast thereon (other than shares beneficially owned by Pioneer or entities controlled by Pioneer) at a meeting of the holders of Exchangeable Shares duly called and held at which holders of at least 50% of the then outstanding Exchangeable Shares are present or represented by proxy. In the event that no such quorum is present at such meeting within one-half hour after the time appointed therefor, then the meeting will be adjourned to such place and time not less than 10 days later as may be determined at the original meeting and the holders of Exchangeable Shares present or represented by proxy at the adjourned meeting may transact the business for which the meeting was originally called. At the adjourned meeting, a resolution passed by the affirmative vote of not less than two-thirds of the votes cast thereon will constitute the approval or consent of the holders of the Exchangeable Shares. Actions of Pioneer Canada under Support Agreement. Under the Exchangeable Share Provisions, Pioneer Canada will agree to take all such actions and do all such things as are necessary or advisable to perform and comply with its obligations under, and to ensure the performance and compliance by Pioneer with its obligations under, the Support Agreement. SUPPORT AGREEMENT The following is a summary description of the material provisions of the Support Agreement and is qualified in its entirety by reference to the full text of the Support Agreement, which is attached as Annex H hereto. Under the Support Agreement, Pioneer will agree that: (i) it will not declare or pay dividends on the Pioneer Common Stock unless Pioneer Canada is able to and simultaneously pays an equivalent dividend on the Exchangeable Shares; (ii) it will cause Pioneer Canada to declare and pay an equivalent dividend on the Exchangeable Shares simultaneously with Pioneer's declaration and payment of dividends on the Pioneer Common Stock; (iii) it will advise Pioneer Canada in advance of the declaration of any dividend on the Pioneer Common Stock and ensure that the declaration date, record date and payment date for dividends on the Exchangeable Shares are the same as that for the Pioneer Common Stock; (iv) it will take all actions and do all things necessary to ensure that Pioneer Canada is able to provide to the holders of the Exchangeable Shares the equivalent number of shares of Pioneer Common Stock in the event of a liquidation, dissolution, or winding-up of Pioneer Canada, a retraction request by a holder of Exchangeable Shares, or a redemption of 188 198 Exchangeable Shares of Pioneer Canada; and (v) it will not vote or otherwise take any action or omit to take any action causing the liquidation, dissolution or winding-up of Pioneer Canada. The Support Agreement also provides that, without the prior approval of Pioneer Canada and the holders of the Exchangeable Shares, Pioneer will not distribute additional shares of Pioneer Common Stock or rights to subscribe therefor or other property or assets to all or substantially all holders of shares of Pioneer Common Stock, nor change the Pioneer Common Stock nor effect any tender offer, share exchange offer, issuer bid, take-over bid or similar transaction affecting the Pioneer Common Stock, unless the same or an equivalent distribution on or change to the Exchangeable Shares (or in the rights of the holders thereof) is made simultaneously. Pioneer has agreed that so long as there remain outstanding any Exchangeable Shares not owned by Pioneer or any entity controlled by Pioneer, Pioneer will remain the beneficial owner, directly or indirectly, of all outstanding shares of Pioneer Canada other than the Exchangeable Shares. In addition, the Support Agreement obligates Pioneer to nominate Messrs. Baroffio and Turcotte to the board of directors of Pioneer in accordance with the same terms as the Combination Agreement. With the exception of administrative changes for the purpose of adding covenants for the protection of the holders of the Exchangeable Shares, making certain necessary amendments or curing ambiguities or clerical errors (in each case provided that the board of directors of each of Pioneer and Pioneer Canada is of the opinion that such amendments are not prejudicial to the interests of the holders of the Exchangeable Shares), the Support Agreement may not be amended without the approval of the holders of the Exchangeable Shares. Under the Support Agreement, Pioneer has agreed not to exercise any voting rights attached to the Exchangeable Shares owned by it or any entity controlled by it on any matter considered at meetings of holders of Exchangeable Shares (including any approval sought from such holders in respect of matters arising under the Support Agreement). VOTING AND EXCHANGE TRUST AGREEMENT The following is a summary description of the material provisions of the Voting and Exchange Trust Agreement and is qualified in its entirety by reference to the full text of the Voting and Exchange Trust Agreement which is attached as Annex I hereto. Under the terms of the Voting and Exchange Trust Agreement, Pioneer will issue and grant to the Trustee the Voting Rights and the Exchange Rights. Voting Rights. Under the Voting and Exchange Trust Agreement, Pioneer will issue the Voting Share to the Trustee for the benefit of the holders (other than Pioneer and its subsidiaries) of the Exchangeable Shares. The Voting Share will carry a number of votes, exercisable at any meeting at which Pioneer Stockholders are entitled to vote, equal to the number of outstanding Exchangeable Shares (other than shares held by Pioneer and its subsidiaries). With respect to any written consent sought from the Pioneer Stockholders, each vote attached to the Voting Share will be exercisable in the same manner as set forth above. Each holder of an Exchangeable Share on the record date for any meeting at which Pioneer Stockholders are entitled to vote will be entitled to instruct the Trustee to exercise one of the votes attached to the Voting Share for such Exchangeable Share. The Trustee will exercise each vote attached to the Voting Share only as directed by the relevant holder and, in the absence of instructions from a holder as to voting, will not exercise such votes. A holder may, upon instructing the Trustee, obtain a proxy from the Trustee entitling the holder to vote directly at the relevant meeting the votes attached to the Voting Share to which the holder is entitled. The Trustee will send to the holders of the Exchangeable Shares the notice of each meeting at which the Pioneer Stockholders are entitled to vote, together with the related meeting materials and a statement as to the manner in which the holder may instruct the Trustee to exercise the votes attaching to the Voting Share, at the same time as Pioneer sends such notice and materials to the Pioneer Stockholders. The Trustee will also send to the holders copies of all information statements, interim and annual financial statements, reports and other materials sent by Pioneer to the Pioneer Stockholders at the same time as such materials are sent to the 189 199 Pioneer Stockholders. To the extent such materials are provided to the Trustee by Pioneer, the Trustee will also send to the holders all materials sent by third parties to Pioneer Stockholders, including dissident proxy circulars and tender and exchange offer circulars, as soon as possible after such materials are first sent to Pioneer Stockholders. All rights of a holder of Exchangeable Shares to exercise votes attached to the Voting Share will cease upon the exchange of all such holder's Exchangeable Shares for shares of Pioneer Common Stock. Exchange Rights. Under the Voting and Exchange Trust Agreement, Pioneer will grant the Exchange Rights to the Trustee for the benefit of the holders of the Exchangeable Shares. Optional Exchange Right. Upon the occurrence and during the continuance of a Pioneer Canada Insolvency Event, a holder of Exchangeable Shares will be entitled to instruct the Trustee to exercise the optional Exchange Right with respect to any or all of the Exchangeable Shares held by such holder, thereby requiring Pioneer to purchase such Exchangeable Shares from the holder. Immediately upon the occurrence of a Pioneer Canada Insolvency Event or any event which may with the passage of time or the giving of notice, become a Pioneer Canada Insolvency Event, Pioneer Canada and Pioneer will give written notice thereof to the Trustee. As soon as practicable thereafter, the Trustee will notify each holder of Exchangeable Shares of such event or potential event and will advise the holder of its rights with respect to the optional Exchange Right. The consideration for each Exchangeable Share to be acquired under the optional Exchange Right will be one share of Pioneer Common Stock plus an additional amount equivalent to the full amount of all dividends declared and unpaid on the Exchangeable Share. If, as a result of liquidity or solvency provisions of applicable law, Pioneer Canada is unable to redeem all of the Exchangeable Shares tendered for retraction by a holder in accordance with the Exchangeable Share Provisions, the holder will be deemed to have exercised the optional Exchange Right with respect to the unredeemed Exchangeable Shares and Pioneer will be required to purchase such shares from the holder in the manner set forth above. Automatic Exchange Right. In the event of a Pioneer Liquidation Event, Pioneer will be required to acquire each outstanding Exchangeable Share by exchanging one share of Pioneer Common Stock for each such Exchangeable Share, plus an additional amount equivalent to the full amount of all declared and unpaid dividends on the Exchangeable Shares. DELIVERY OF PIONEER COMMON STOCK Pioneer will ensure that all shares of Pioneer Common Stock to be delivered by it under the Support Agreement or on the exercise of the Exchange Rights under the Voting and Exchange Trust Agreement are duly registered, qualified or approved under applicable Canadian and United States securities laws, if required so that such shares may be freely traded by the holder thereof (other than any restriction on transfer by reason of a holder being a "control person" of Pioneer for purposes of Canadian law or an "affiliate" of Pioneer for purposes of United States law). In addition, Pioneer will take all actions necessary to cause all such shares of Pioneer Common Stock to be listed or quoted for trading on all stock exchanges or quotation systems on which outstanding shares of Pioneer Common Stock are then listed or quoted for trading. CALL RIGHTS The following description of the Call Rights is qualified in its entirety by reference to the full text of the Plan of Arrangement and the Exchangeable Share Provisions, which are attached as Annexes E and F hereto, respectively. In the circumstances described below, Pioneer will have certain overriding rights to acquire Exchangeable Shares from holders thereof for one share of Pioneer Common Stock for each Exchangeable Share acquired, plus an amount equivalent to the full amount of all declared and unpaid dividends on the Exchangeable Shares. Different Canadian federal income tax consequences to a holder of Exchangeable Shares may arise 190 200 depending upon whether the Call Rights are exercised by Pioneer or whether the relevant Exchangeable Shares are redeemed by Pioneer Canada pursuant to the Exchangeable Share Provisions in the absence of the exercise by Pioneer of the Call Rights. See "Income Tax Considerations to Chauvco Shareholders." Retraction Call Right. Pursuant to the Exchangeable Share Provisions, a holder requesting Pioneer Canada to redeem the Exchangeable Shares will be deemed to offer such shares to Pioneer, and Pioneer will have an overriding Retraction Call Right to acquire all but not less than all of the Exchangeable Shares that the holder has requested Pioneer Canada to redeem in exchange for one share of Pioneer Common Stock for each Exchangeable Share, plus an additional amount equivalent to the full amount of all declared and unpaid dividends thereon. At the time of a Retraction Request by a holder of Exchangeable Shares, Pioneer Canada will immediately notify Pioneer. Pioneer must then advise Pioneer Canada within two business days as to whether Pioneer will exercise the Retraction Call Right. If Pioneer does not advise Pioneer Canada within such two business day period, Pioneer Canada will notify the holder as soon as possible thereafter that Pioneer will not exercise the Retraction Call Right. A holder may revoke his or her Retraction Request, at any time prior to the close of business on the business day preceding the Retraction Date, in which case the holder's Exchangeable Shares will neither be purchased by Pioneer nor redeemed by Pioneer Canada. If the holder does not revoke his or her Retraction Request, on the Retraction Date the Exchangeable Shares that the holder has requested Pioneer Canada to redeem will be acquired by Pioneer (assuming Pioneer exercises its Retraction Call Right) or redeemed by Pioneer Canada, as the case may be, in each case for one share of Pioneer Common Stock for each Exchangeable Share plus an additional amount equivalent to the full amount of all declared and unpaid dividends on the Exchangeable Shares. Liquidation Call Right. Pursuant to the Plan of Arrangement, Pioneer will be granted an overriding Liquidation Call Right, in the event of and notwithstanding a proposed Pioneer Canada Insolvency Event, to acquire all but not less than all of the Exchangeable Shares then outstanding in exchange for Pioneer Common Stock and, upon the exercise by Pioneer of the Liquidation Call Right, the holders thereof will be obligated to transfer such shares to Pioneer. The acquisition by Pioneer of all of the outstanding Exchangeable Shares upon the exercise of the Liquidation Call Right will occur on the effective date of the voluntary or involuntary liquidation, dissolution or winding-up of Pioneer Canada. Redemption Call Right. Pursuant to the Plan of Arrangement, Pioneer will be granted an overriding Redemption Call Right, notwithstanding the proposed automatic redemption of the Exchangeable Shares by Pioneer Canada pursuant to the Exchangeable Share Provisions, to acquire on the Automatic Redemption Date all but not less than all of the Exchangeable Shares then outstanding in exchange for Pioneer Common Stock plus an additional amount equivalent to the full amount of all declared and unpaid dividends on the Exchangeable Shares and, upon the exercise by Pioneer of the Redemption Call Right, the holders thereof will be obligated to transfer such shares to Pioneer. Effect of Call Right Exercise. If Pioneer exercises one or more of its Call Rights, it will directly issue shares of Pioneer Common Stock to holders of Exchangeable Shares and will become the holder of such Exchangeable Shares. Pioneer will not be entitled to exercise any voting rights attached to the Exchangeable Shares it so acquires. If Pioneer declines to exercise its Call Rights when applicable, it will be required, pursuant to the Support Agreement, to issue shares of Pioneer Common Stock to Pioneer Canada which will, in turn, transfer such stock to the holders of Exchangeable Shares in consideration for the return and cancellation of such Exchangeable Shares. The tax consequences resulting from Pioneer's exercise of one or more of the Call Rights are discussed in "Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders -- Canadian Federal Income Tax Considerations to Chauvco Shareholders and Chauvco Optionholders," which includes a discussion on deemed dividends and Part VI.1 tax. DISSENTING SHAREHOLDERS' RIGHTS Under the DGCL, Pioneer Stockholders will not have appraisal or dissenter's rights relating to the Transaction. 191 201 The following description of the rights of dissenting Chauvco Shareholders is not a comprehensive statement of the procedures to be followed by a dissenting shareholder who seeks payment of the fair value of its Chauvco Common Shares and is qualified in its entirety by the reference to the full text of the Interim Order and Section 184 of the ABCA which are attached to this Joint Proxy Statement as Annexes D and M, respectively. A shareholder who intends to exercise his right of dissent and appraisal should carefully consider and comply with the provisions of that section, as modified by the Interim Order and should seek his own legal advice. Failure to comply with the provisions of that section, as modified by the Interim Order and to adhere to the procedures established therein may result in the loss of all rights thereunder. The Court hearing the application for the Final Order has the discretion to alter the rights of dissent described herein based on the evidence presented at such hearing. Under the Interim Order, a shareholder is entitled, in addition to any other right he may have, to dissent and to be paid by Chauvco the fair value of the Chauvco Common Shares held by him in respect of which he dissents, determined as of the close of business on the last business day before the day on which the resolution from which he dissents was adopted. A shareholder may dissent only with respect to all of the shares held by him or on behalf of any one beneficial owner and registered in the dissenting shareholder's name. The demand for appraisal must be executed by or for the holder of record, fully and correctly, as such holder's name appears on the holder's share certificates. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy or a tenancy in common, the demand should be made by or for all owners of record. An authorized agent, including one or more joint owners, may execute the demand for appraisal for a holder of record; however, such agent must identify the record owner or owners and expressly identify the record owner or owners, and expressly disclose in such demand that the agent is acting as agent for the record owner or owners. PERSONS WHO ARE BENEFICIAL OWNERS OF CHAUVCO COMMON SHARES REGISTERED IN THE NAME OF A BROKER, CUSTODIAN, NOMINEE OR OTHER INTERMEDIARY WHO WISH TO DISSENT, SHOULD BE AWARE THAT ONLY THE REGISTERED OWNER OF SUCH SHARES IS ENTITLED TO DISSENT. A REGISTERED HOLDER SUCH AS A BROKER WHO HOLDS CHAUVCO COMMON SHARES AS NOMINEE FOR BENEFICIAL OWNERS, SOME OF WHOM DESIRE TO DEMAND APPRAISAL, MUST EXERCISE DISSENT RIGHTS ON BEHALF OF SUCH BENEFICIAL OWNERS WITH RESPECT TO THE SHARES HELD FOR SUCH BENEFICIAL OWNERS. IN SUCH CASE, THE DEMAND FOR APPRAISAL SHOULD SET FORTH THE NUMBER OF CHAUVCO COMMON SHARES COVERED BY IT. A dissenting shareholder must send to Chauvco a written objection to the Arrangement Resolution, which written objection must be received by the Secretary of Chauvco in care of Corporate Shareholder Services Inc., Suite 1485, 550 6th Avenue S.W., Calgary, Alberta T2B OS2, or the Chairman of the Chauvco Meeting at or before the Chauvco Meeting. An application may be made to the Court to fix the fair value of the dissenting shareholder's Chauvco Common Shares after the Effective Date. If an application to the Court is made by either Chauvco or a dissenting shareholder, Chauvco must, unless the Court otherwise orders, send to each dissenting shareholder a written offer to pay him an amount considered by the board of directors to be the fair value of the Chauvco Common Shares. The offer, unless the Court otherwise orders, will be sent to each dissenting shareholder at least 10 days before the date on which the application is returnable; if Chauvco is the applicant, or within 10 days after Chauvco is served with notice of the application, if a shareholder is the applicant. The offer will be made on the same terms to each dissenting shareholder and will be accompanied by a statement showing how the fair value was determined. A dissenting shareholder may make an agreement with Chauvco for the purchase of his Chauvco Common Shares in the amount of Chauvco's offer (or otherwise) at any time before the Court pronounces an order fixing the fair value of the Chauvco Common Shares. A dissenting shareholder is not required to give security for costs in respect of an application and, except in special circumstances, will not be required to pay the costs of the application or appraisal. On the application, the Court will make an order fixing the fair value of the Chauvco Common Shares of all dissenting shareholders who are parties to the application, giving judgment in that amount against Chauvco and in favour of each of those dissenting shareholders and fixing the time within which Chauvco must pay that amount payable to the dissenting shareholders. The Court may in its discretion allow a reasonable rate of interest on the amount payable to each dissenting shareholder 192 202 calculated from the date on which the shareholder ceases to have any rights as a shareholder until the date of payment. On the Arrangement becoming effective, or upon the making of an agreement between Chauvco and the dissenting shareholder as to the payment to be made by Chauvco to the dissenting shareholder, or upon the pronouncement of a Court order, whichever first occurs, the dissenting shareholder will cease to have any rights as a shareholder other than the right to be paid the fair value of the Chauvco Common Shares in the amount agreed to between Chauvco and the dissenting shareholder or in the amount of the judgment, as the case may be. Until one of these events occurs, the shareholder may withdraw his dissent, or Chauvco may rescind the Arrangement Resolution and in either event, the dissent and appraisal proceedings in respect of that shareholder will be discontinued. The Combination Agreement provides that the obligations with respect to payments to dissenting shareholders shall be apportioned between Chauvco and CRI in accordance with the respective values of such entities, all as set forth in the Plan of Arrangement. The Combination Agreement provides that it is a condition to the obligations of Pioneer to complete the Arrangement that holders of not more than 5% of the issued and outstanding Chauvco Common Shares exercise their right of dissent as described above. LEGAL MATTERS Certain legal matters in connection with the Transaction will be passed upon by Bennett Jones Verchere, Calgary, Alberta, on behalf of Chauvco, and by Vinson & Elkins L.L.P., Dallas, Texas, on behalf of Pioneer. Certain tax matters will be passed upon by Felesky Flynn and Baker & Botts, L.L.P. on behalf of Chauvco. Michael D. Wortley, a partner in the law firm of Vinson & Elkins L.L.P., is a director of Pioneer and beneficially owns 6,623 shares of Pioneer Common Stock. EXPERTS The Consolidated Financial Statements of Pioneer (successor to Parker & Parsley Petroleum Company and subsidiaries) have been included in this Joint Proxy Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to a change in the method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of in 1995 and a change in the method of accounting for income taxes in 1993. The Consolidated Financial Statements of Mesa included in this Joint Proxy Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The Consolidated Financial Statements of Chauvco included in this Joint Proxy Statement have been audited by Price Waterhouse, chartered accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The Consolidated Financial Statements of CRI included in this Joint Proxy Statement have been audited by Price Waterhouse, chartered accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. The estimates of Pioneer's proved reserves as of December 31, 1996 set forth in this Joint Proxy Statement are based upon a reserve report prepared by Pioneer and audited by Netherland, Sewell & Associates, Inc., independent petroleum consultants, and are included herein upon the authority of such firm as experts with respect to such matters covered by such report. The estimates of Mesa's proved reserves as of December 31, 1996 set forth in this Joint Proxy Statement with respect to its Hugoton and West Panhandle field properties are based upon a reserve report prepared by 193 203 Williamson Petroleum Consultants, Inc., independent petroleum consultants, and are included herein upon the authority of such firm as experts with respect to such matters covered by such report. The estimates of Chauvco's proved reserves as of December 31, 1996 set forth in this Joint Proxy Statement are based upon reserve reports prepared by Gilbert Laustsen Jung Associates Ltd. and Martin Petroleum and Associates, independent petroleum consultants, and are included herein upon the authority of such firm as experts with respect to such matters covered by such report. AVAILABLE INFORMATION FOR PIONEER Pioneer is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the SEC. The reports, proxy statements and other information filed by Pioneer with the SEC can be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such reports, proxy statements and other information filed with the SEC are also available at the SEC's site on the World Wide Web located at http://www.sec.gov. Copies of such material also can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, material filed by Pioneer can be inspected at the offices of the New York Stock Exchange, Eleven Wall Street, York, New York 10005. STOCKHOLDER PROPOSALS Any Pioneer Stockholder who wishes to submit a proposal for action to be included in the proxy statement and form of proxy relating to Pioneer's 1998 annual meeting of stockholders is required to submit such proposal to Pioneer on or before December 31, 1997. APPROVAL OF PROXY STATEMENT BY CHAUVCO BOARD OF DIRECTORS The contents of this joint management information circular and proxy statement and the sending thereof to the shareholders of Chauvco have been approved by the Chauvco board of directors. The foregoing contains no untrue statement of a material fact and does not omit to state a material fact that is required to be stated or that is necessary to make a statement not misleading in the light of the circumstances in which it was made. Guy J. Turcotte Chairman and Chief Executive Officer James K. Wilson Senior Vice President Finance & Administration and Chief Financial Officer November , 1997 Calgary, Alberta 194 204 GLOSSARY OF TERMS Unless the context otherwise requires, the following terms shall have the meanings set forth below when used in this Joint Proxy Statement. These defined terms are not used in the financial statements attached hereto. "ABCA" means the Business Corporations Act (Alberta). "Arrangement" means the proposed arrangement of Chauvco under Section 186 of the ABCA pursuant to the Plan of Arrangement. "Arrangement Resolution" means the special resolution of Chauvco Shareholders concerning the Arrangement in the form set out in Annex B to this Joint Proxy Statement. "Automatic Exchange Rights" means the rights granted to the Trustee for the benefit of the holders of the Exchangeable Shares pursuant to the Voting and Exchange Trust Agreement to automatically exchange the Exchangeable Shares for shares of Pioneer Common Stock upon a Pioneer Liquidation Event. "Automatic Redemption Date" means the fifth anniversary of the date of the first issuance of Exchangeable Shares unless (a) such date shall be extended at any time or from time to time to a specified later date by the Pioneer Board but not later than December 31, 2005 or (b) such date shall be accelerated at any time to a specified earlier date (but no earlier than the third anniversary of the first issuance of Exchangeable Shares) by the Pioneer Board if at such time there are issued and outstanding less than 5% of the number of Exchangeable Shares initially issued and outstanding pursuant to the Plan of Arrangement (other than Exchangeable Shares held by Pioneer and its subsidiaries) and as such number of shares may be adjusted as deemed appropriate by the Pioneer Board to give effect to any subdivision or consolidation of or stock dividend on the Exchangeable Shares, any issuance or distribution of rights to acquire Exchangeable Shares or securities exchangeable for or convertible into Exchangeable Shares, any issue or distribution of other securities or rights or evidences of indebtedness or assets, or any other capital reorganization or other transaction affecting the Exchangeable Shares, in which case the Automatic Redemption Date shall be such later or earlier date; provided, however, that the accidental failure or omission to give any such notice of extension or acceleration, as the case may be, to less than 10% of such holders of Exchangeable Shares shall not affect the validity of such extension or acceleration. "Bbl" means a barrel of oil and condensate or natural gas liquids. "BCCA" means the Company Act (British Columbia). "Bcf" means billion cubic feet of natural gas. "Bcfe" means billion cubic feet of natural gas equivalents. "BOE" means one barrel of oil equivalent with gas reserves converted to a Bbl of oil equivalent on the basis of 6 Mcf gas to 1 Bbl of oil; provided that "BOE (10:1)" converts such gas reserves on the basis of 10 Mcf of gas to 1 Bbl of oil. "Btu" or "British Thermal Unit" means the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit. "Call Rights" means the Liquidation Call Right, the Redemption Call Right and the Retraction Call Right, collectively. "Canadian dollar equivalent" means the product obtained by multiplying the U.S. dollar amount by the Currency Exchange Rate. "Canadian dollars" or "C$" means Canadian dollars. "Canadian GAAP" means generally accepted accounting principles in Canada. "Canadian Tax Act" means the Income Tax Act (Canada), as amended. 195 205 "Cash Payment" means the cash payment, if any, which a Chauvco Shareholder or Chauvco Optionholder is entitled to receive in accordance with Section 2.2 of the Arrangement. "Chauvco" means Chauvco Resources Ltd., an Alberta corporation. "Chauvco Affiliate" means each affiliate (as such term is defined pursuant to Rule 145 under the Securities Act) of Chauvco. "Chauvco Affiliates Agreements" means the affiliate agreements executed by each Chauvco Affiliate and agreed to and accepted by Pioneer and Chauvco. "Chauvco Articles" means the Chauvco articles of amalgamation. "Chauvco Board" means the Board of Directors of Chauvco. "Chauvco Bylaws" means Chauvco's bylaws, as amended from time to time. "Chauvco Common Shares" means the common shares of Chauvco. "Chauvco Meeting" means the special meeting of Chauvco Shareholders to be held with respect to, among other things, the approval by Chauvco Shareholders of the Arrangement. "Chauvco Option Plan" means Chauvco's stock option plan as amended and restated on November 10, 1995. "Chauvco Options" means all outstanding options to purchase Chauvco Common Shares, including all outstanding options granted under the Chauvco Option Plan. "Chauvco Optionholders" means the holders of Chauvco Options. "Chauvco Record Date" means , 1997. "Chauvco Shareholders" means the holders of Chauvco Common Shares. "Closing" means the execution and delivery of the documents required to effectuate the transactions contemplated by the Combination Agreement and the closing of the transactions contemplated by the Combination Agreement. "Closing Date" means December , 1997, or such other date as may be determined by Pioneer and Chauvco. "Combination Agreement" means the Combination Agreement by and between Pioneer and Chauvco dated as of September 3, 1997, a copy of which is attached hereto as Annex C. "Competition Act" means the Competition Act (Canada). "Condensate" means a hydrocarbon mixture that becomes liquid and separates from natural gas when the gas is produced and is similar to crude oil. "Court" means the Court of Queen's Bench of Alberta. "CR" means CR International Limited, a wholly owned subsidiary of Chauvco. "CRI" means Chauvco Resources International Ltd., a wholly-owned subsidiary of Chauvco. "CRI Shares" means all of the issued and outstanding common shares of CRI. "Currency Exchange Rate" has the meaning ascribed to such term in the Plan of Arrangement. "Development well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. "DGCL" means the Delaware General Corporation Law, as amended. 196 206 "Dissent Notice" means a written objection to the Arrangement sent by a Chauvco Shareholder or Chauvco Optionholder to Chauvco in accordance with applicable law. See, "Dissenting Shareholders' and Optionholders' Rights." "Effective Date" means the date shown on the certificate of amendment issued by the Registrar under the ABCA giving effect to the Arrangement. "Effective Time" means 12:01 a.m. (Calgary time) on the Effective Date. "Election Deadline" has the meaning ascribed to such term in the Plan of Arrangement. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Exchange Ratio" has the meaning set forth in Section 2.2 of the Plan of Arrangement. "Exchange Rights" means the Automatic Exchange Rights and the optional exchange right granted to the Trustee for the use and benefit of the holders of the Exchangeable Shares pursuant to the Voting and Exchange Trust Agreement to require Pioneer to purchase Exchangeable Shares from the holders thereof in exchange for shares of Pioneer Common Stock upon the occurrence of a Pioneer Canada Insolvency Event. "Exchangeable Share Provisions" means the rights, privileges, restrictions and conditions attaching to the Exchangeable Shares, which are attached hereto as Annex F. "Exchangeable Shares" means the exchangeable shares of Pioneer Canada having the rights, privileges, restrictions and conditions set forth in the Exchangeable Share Provisions. "Final Order" means the final order of the Court approving the Arrangement. "FTC" means the Federal Trade Commission and all successors thereto. "Gabon Securities" means (i) all of the issued and outstanding securities of Chauvco Resources (Gabon) S.A., Chauvco Resources (Gabon-Ngalo) S.A., Chauvco Resources (Gabon-Maga) S.A., Chauvco Resources (Gabon-Avomo) S.A. and CR Trading Co. Ltd. (collectively, the "Gabon Subsidiaries"), (ii) 75% of the issued and outstanding securities of Westoil Marine & Transport Co. Ltd. ("Westoil") and (iii) all of its rights under a loan in the amount of U.S.$909,421.60 made by CR to Olympic Marine Services International, Inc. (which owns the remaining 25% of the issued and outstanding securities of Westoil), any and all advances made by CR to Westoil, and any and all advances made by Chauvco (all of which shall have first been assigned by Chauvco to CR) to the Gabon Subsidiaries and Westoil. "Gabon Subsidiaries" has the meaning set forth in the definition of Gabon Securities. "Goldman Sachs" means Goldman, Sachs & Co., financial advisor to Pioneer. "Gross," when used with respect to acres or wells, refers to the total acres or wells in which Pioneer or Chauvco, as the case may be, has a working interest. "HSR Act" means the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Infill Drilling" means drilling of an additional well or additional wells in order to more adequately drain a reservoir. "Interim Order" means the interim order of the Court dated , 1997, a copy of which is attached hereto as Annex D. "Joint Proxy Statement" means this joint management information circular and proxy statement relating to the Chauvco Meeting and the Pioneer Meeting. "Letter of Transmittal and Election Form" means the letter delivered to holders of Chauvco Common Shares which, when duly completed and returned with a certificate for Chauvco Common Shares, will enable 197 207 such shareholder to exchange such certificate for CRI Shares, Pioneer Common Stock, Exchangeable Shares or a combination thereof. "Liquidation Call Right" means the right of Pioneer, in the event of a proposed liquidation, dissolution or winding-up of Pioneer Canada, to purchase all of the outstanding Exchangeable Shares from the holders thereof on the effective date of any such liquidation, dissolution or winding-up in exchange for shares of Pioneer Common Stock pursuant to the Plan of Arrangement. "liquids" or "NGL" or "NGLs" means natural gas liquids and refer to their constituent hydrocarbons such as ethane, propane, butane, isobutane and natural gasolines. "MBbls" means thousands of barrels of oil. "Mcf" means thousand cubic feet of natural gas. "Mcfe" means thousand cubic feet of natural gas equivalents. "MMBbls" means millions of barrels of oil. "MMBOE" means millions of barrels of oil equivalents. "MMBtu" means one million British Thermal Units. "MMcf" means million cubic feet of natural gas. "MMcfe" means million cubic feet of natural gas equivalents. "Mstb" means thousand stock tank barrels. "Natural gas equivalents" means a volume, expressed in Mcf's of natural gas, that includes not only natural gas but also oil and natural gas liquids converted to an equivalent quantity of natural gas on an energy equivalent basis. Equivalent gas reserves are based on a conversion factor of 6 Mcf of gas per barrel of liquids. "Net," when used with respect to acres or wells, refers to gross acres of wells multiplied, in each case, by the percentage working interest owned by Pioneer or Chauvco, as the case may be. "Net production" means production that is owned by Pioneer or Chauvco, as the case may be, less royalties and production due others. "NYSE" means the New York Stock Exchange. "Oil" means crude oil or condensate. "Oil equivalents" means a volume, expressed in Bbls of oil, that includes not only oil but also natural gas and natural gas liquids converted to an equivalent quantity of oil on an energy equivalent basis. Equivalent oil reserves are based on the conversion factor of 6 Mcf of gas per barrel of liquids. "Operator" means the individual or company responsible for the exploration, development and production of an oil or gas well or lease. "Option Letter of Transmittal and Election Form" has the meaning ascribed to such term in the Plan of Arrangement. "Option Payment" means the payment by each Chauvco Optionholder to Pioneer Canada of the exercise price such holder's Chauvco Options. "Parker/Mesa Merger" means the mergers of Mesa and Parker & Parsley on August 7, 1997, which transaction resulted in the creation of Pioneer Natural Resources Company. "Pioneer" means Pioneer Natural Resources Company, a Delaware corporation, and its predecessors. "Pioneer Affiliate" means each affiliate (as such term is defined pursuant to Rule 145 under the Securities Act) of Pioneer. 198 208 "Pioneer Affiliates Agreements" means the affiliate agreements executed by each Pioneer Affiliate and agreed to and accepted by Pioneer and Chauvco. "Pioneer Board" means the Board of Directors of Pioneer. "Pioneer Bylaws" means the amended and restated bylaws of Pioneer. "Pioneer Canada" means Pioneer Natural Resources (Canada) Ltd., an indirectly owned subsidiary of Pioneer. "Pioneer Canada Insolvency Event" means any insolvency or bankruptcy proceeding instituted by or against Pioneer Canada, including any such proceeding under the Companies' Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada) and the admission in writing by Pioneer Canada of its inability to pay its debts generally as they become due and the inability of Pioneer Canada, as a result of solvency requirements of applicable law, to redeem any Exchangeable Shares tendered for retraction. "Pioneer Common Stock" means the common stock, par value $0.01 per share, of Pioneer, authorized and outstanding prior to the Closing. "Pioneer Liquidation Event" means (i) any determination by Pioneer's board of directors to institute voluntary liquidation, dissolution, or winding-up proceedings with respect to Pioneer or to effect any other distribution of assets of Pioneer among its stockholders for the purpose of winding up its affairs; or (ii) immediately upon the earlier of (A) receipt by Pioneer of notice of, and (B) Pioneer becoming aware of any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of Pioneer or to effect any other distribution of assets of Pioneer among its stockholders for the purpose of winding-up its affairs. "Pioneer Meeting" means the special meeting of Pioneer Stockholders to be held with respect to, among other things, approval by the Pioneer Stockholders of the Combination Agreement and the transactions contemplated thereby. "Pioneer Record Date" means November , 1997. "Pioneer Restated Certificate" means the amended and restated certificate of incorporation of Pioneer. "Pioneer Stock Price" means the average closing sales price per share of Pioneer Common Stock over the 10 consecutive trading days ending the third day next preceding the date of the Chauvco Meeting. "Pioneer Stockholders" means the holders of Pioneer Common Stock. "Plan of Arrangement" means the plan of arrangement proposed under Section 186 of the ABCA substantially in the form attached hereto as Annex E, as amended, modified or supplemented from time to time in accordance with its terms. "Proved developed reserves" means, with respect to Pioneer, reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery will be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. "Proved reserves" means, with respect to Pioneer, the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalation based upon future conditions. i. Reservoirs are considered proved if economic productivity is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately 199 209 adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. ii. Reserves that can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. iii. Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified as "indicated additional reserve"; (B) crude oil, natural gas and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics or economic factors; (C) crude oil, natural gas and natural gas liquids that may occur in undrilled prospects; and (D) crude oil, natural gas and natural gas liquids that may be recovered from oil shales, coal, gilsonite and other such sources. "Proved undeveloped reserves" means, with respect to Pioneer, reserves that are expected to be recovered from new wells on undrilled coverage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage is limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates for proved undeveloped reserves attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. "RBC DS" means RBC Dominion Securities Inc., financial advisor to Chauvco. Record Date" has the meaning ascribed to it in the Plan of Arrangement, attached hereto as Annex E. "Redemption Call Right" means the right of Pioneer to purchase all of the outstanding Exchangeable Shares from the holders thereof on the Automatic Redemption Date in exchange for shares of Pioneer Common Stock pursuant to the Plan of Arrangement. "Reserves"means, with respect to Pioneer, proved reserves, and, with respect to Chauvco, means proved reserves and probable reserves. "Retraction Call Right" means the overriding right of Pioneer, in the event of a proposed retraction of Exchangeable Shares by a holder thereof, to purchase from such holder on the Retraction Date the Exchangeable Shares tendered for retraction in exchange for shares of Pioneer Common Stock pursuant to the Exchangeable Share Provisions. "Retraction Date" means a date, determined by a holder of Exchangeable Shares, on which such holder can effect a retraction of such Exchangeable Shares as further set out in the Exchangeable Share Provisions and described in "The Transaction -- Transaction Mechanics and Description of Exchangeable Shares -- Exchange and Call Right." "Retraction Request" means a duly executed statement prepared by a holder of Exchangeable Shares in the form of Exhibit A to the Exchangeable Share Provisions, or in such other form as may be acceptable to Pioneer Canada. "Royalty" means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by the owner of the leasehold in connection with a transfer to a subsequent owner. "Salomon Brothers" means Salomon Brothers Inc, financial advisor to Chauvco. 200 210 "SEC" means the United States Securities and Exchange Commission. "Securities Act" means the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SEC PV10" means the present value of estimated future revenues to be generated from the production of proved reserves calculated in accordance with SEC guidelines, net of estimated production and future development costs, using prices and costs as of the date of estimation without future escalation, except as otherwise provided by contract, without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization, and discounted using an annual discount rate of 10%. "Support Agreement" means the Support Agreement to be entered into between Pioneer and Pioneer Canada, substantially in the form of Annex H hereto. "Tcf" means trillion cubic feet of natural gas. "Tcfe" means trillion cubic feet of natural gas equivalents. "Transaction" means the transactions contemplated by the Combination Agreement and the Plan of Arrangement. "Trustee" means Montreal Trust Company of Canada, or any successor thereto, pursuant to the Voting and Exchange Trust Agreement. "TSE" means The Toronto Stock Exchange. "Unitized" means the joint operation of all or some portion of a producing reservoir. Unitization is important where there is separate ownership of portions of the rights in a common reservoir in order that it may be made economically feasible to engage in cycling, pressure maintenance or secondary recovery operations. In a field that has been unitized, injection and production wells may be located in accordance with the best engineering practices and without regard to lease or property lines. "U.S. Code" means the United States Internal Revenue Code of 1986, as amended. "U.S. dollars" or "$" means United States dollars. "U.S. GAAP" means generally accepted accounting principles in the United States. "Voting and Exchange Trust Agreement" means the voting and exchange trust agreement to be entered into among Pioneer, Pioneer Canada and the Trustee, substantially in the form of Annex I hereto. "Voting Rights" means the rights of the holders of Exchangeable Shares to direct the voting of the Pioneer Voting Share in accordance with the Voting and Exchange Trust Agreement. "Voting Share" means the one share of Pioneer Special Voting Stock, par value $.01 per share, to be issued by Pioneer and deposited with the Trustee pursuant to the Voting and Exchange Trust Agreement. "Working interest" means an interest in an oil and gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to the owners of royalties. For example, the owner of a 100% working interest in a lease burdened only by a landowner's royalty of 12.5% would be required to pay 100% of the costs of a well but would be entitled to retain only 87.5% of the production. 201 211 INDEX TO FINANCIAL STATEMENTS (THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
PAGE ----- PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS: Preliminary Statement..................................... F-3 Unaudited Pro Forma Combined Financial Statements of Pioneer Natural Resources Company: Unaudited Pro Forma Combined Balance Sheet of Pioneer Natural Resources Company as of June 30, 1997......... F-5
Unaudited Pro Forma Combined Balance Sheet of Pioneer Natural Resources Company as of December 31, 1996..... F-6 Unaudited Pro Forma Combined Statement of Operations of Pioneer Natural Resources Company for the six months ended June 30, 1997................................... F-7 Unaudited Pro Forma Combined Statement of Operations of Pioneer Natural Resources Company for the year ended December 31, 1996..................................... F-8 Unaudited Pro Forma Financial Statements of Pioneer Natural Resources Company: Unaudited Pro Forma Balance Sheet of Pioneer Natural Resources Company as of June 30, 1997................. F-9 Unaudited Pro Forma Balance Sheet of Pioneer Natural Resources Company as of December 31, 1996............. F-10 Unaudited Pro Forma Statement of Operations of Pioneer Natural Resources Company for the six months ended June 30, 1997......................................... F-11 Unaudited Pro Forma Statement of Operations of Pioneer Natural Resources Company for the year ended December 31, 1996.............................................. F-12 Unaudited Pro Forma Adjusted Statement of Operations of Pioneer Natural Resources Company for the year ended December 31, 1996..................................... F-13 Unaudited Pro Forma Statement of Operations of Mesa Inc. for the year ended December 31, 1996............. F-14 Unaudited Pro Forma Financial Statements of Chauvco Resources, Ltd.: Unaudited Pro Forma Balance Sheet of Chauvco Resources, Ltd. as of June 30, 1997.............................. F-15 Unaudited Pro Forma Balance Sheet of Chauvco Resources, Ltd. as of December 31, 1996.......................... F-16 Notes to Unaudited Pro Forma Combined Financial Statements............................................. F-17 PIONEER NATURAL RESOURCES COMPANY AND SUBSIDIARIES: Independent Auditors' Report.............................. F-28 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995............................. F-29 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-30 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1997 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-31 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-32 Notes to Consolidated Financial Statements................ F-33 Unaudited Supplementary Information....................... F-62 MESA INC., AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-69 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995............................. F-70 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-71 Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1997 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-72 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992........... F-73 F-1 212
PAGE ----- Notes to Consolidated Financial Statements................ F-74 Unaudited Supplementary Information....................... F-95 CHAUVCO RESOURCES LTD. AND SUBSIDIARIES: Auditors' Report.......................................... F-101 Consolidated Statement of Financial Position as at June 30, 1997, December 31, 1996 and 1995............................................... F-102 Consolidated Statement of Earnings and Retained Earnings for the six months ended June 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994....... F-103 Consolidated Statement of Changes in Cash Position for the six months ended June 30, 1997 and 1996 and for the years ended December 31, 1996.......................... F-104 Notes to Consolidated Financial Statements................ F-105
F-2 213 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF PIONEER NATURAL RESOURCES COMPANY In accordance with the Combination Agreement, holders of Chauvco Common Shares will receive for each Chauvco Common Share held (i) one CRI Share and (ii) in certain cases, at the election of a Chauvco Shareholder, either the number of shares of Pioneer Common Stock or Exchangeable Shares, or a combination of both, determined by multiplying each Chauvco Common Share held by the Exchange Ratio. The Exchange Ratio is dependent upon the Pioneer Stock Price, which will be the average closing sales price per share of Pioneer Common Stock over the ten consecutive trading days ending the third trading day next preceding the date of the Chauvco Meeting. The Exchangeable Shares entitle the holders to dividend and other rights economically equivalent to those of Pioneer Common Stock and, through a voting trust, the right to vote at meetings of Pioneer Stockholders. The range of possible Exchange Ratios to be utilized to determine the numbers of shares of Pioneer Common Stock or Exchangeable Shares, or a combination of both, to be exchanged for one Chauvco Common Share is described below: A. If the Pioneer Stock Price is less than $33.50 the Exchange Ratio is .493827. B. If the Pioneer Stock Price is at least $33.50 but less than $39.01 the Exchange Ratio is the product of the following computation: Exchange Ratio = (.493827 - (((Pioneer Stock Price - 33.50)/5.51) X .042360)). C. If the Pioneer Stock Price is equal to or greater than $39.01 the Exchange Ratio is .451467. In lieu of fractional shares of Pioneer Common Stock or Exchangeable Shares, each holder of a Chauvco Common Share who otherwise would be entitled to receive such fractional share will receive an amount of cash, without interest, equal to the product of such fractional interest multiplied by the Pioneer Stock Price converted to Canadian dollars using the noon spot rate of exchange of U.S. dollars to Canadian dollars announced by the Bank of Canada on the day preceding the date of calculation. The Combination Agreement also provides that, if the Exchange Ratio is above .465116, Pioneer may elect to deliver, in lieu of Pioneer Common Stock or Exchangeable Shares, a number of shares of Pioneer Common Stock or Exchangeable Shares for each Chauvco Common Share equal to the Exchange Ratio of .465115 and an amount of cash per Chauvco Common Share equal to the product of (i) the Pioneer Stock Price multiplied by the noon spot rate of exchange of U.S. dollars and Canadian dollars announced by the Bank of Canada on the day preceding the date of calculation for the exchange and (ii) the Exchange Ratio as calculated above in A. or B. less .465116. The value of Pioneer Common Stock for use in determining the aggregate purchase consideration allocated to the acquired assets and liabilities of Chauvco ("Consideration") will be either (i) the average trading price of Pioneer Common Stock during the seven days surrounding the announcement of the Transaction (the "Seven Day Average") or (ii) the market price of Pioneer common stock on the date of the Chauvco Meeting. If the Pioneer Stock Price is equal to or greater than $39.01, the Consideration will be based upon the Seven Day Average of $42.17. However, if the Pioneer Stock Price is below $39.01, the value for use in determining the Consideration will be the market price of Pioneer Common Stock on the date of the Chauvco Meeting. The unaudited pro forma combined financial statements have been prepared under the assumption that the Consideration will be based on the Seven Day Average of $42.17. See Note 5 for a sensitivity analysis should a decline in the Pioneer Stock Price occur. In August 1997, the stockholders of Pioneer's predecessor entities, Parker & Parsley and Mesa, approved an Amended and Restated Agreement and Plan of Merger ("Merger Agreement") that resulted in the formation of Pioneer. In accordance with the provisions of Accounting Principles Board No. 16, "Business Combinations," ("APB 16"), the merger was treated as an acquisition of Mesa by Parker & Parsley. As a result, the historical financial statements of Pioneer are those of Parker & Parsley and will present the addition of Mesa's assets and liabilities as an acquisition by Pioneer in August 1997 and all references to Pioneer contained herein are references to Parker & Parsley for dates prior to the Parker/Mesa Merger. F-3 214 The unaudited pro forma combined balance sheets and statements of operations have been prepared to give effect to certain transactions as described below. The unaudited pro forma combined balance sheets of Pioneer as of June 30, 1997 and December 31, 1996 have been prepared to give effect to (i) the Transaction as if such transaction had occurred on the dates presented, (ii) the Parker/Mesa Merger as if such transaction had occurred on the dates presented and (iii) the conversion of Pioneer's 6 1/4% Cumulative Monthly Income Convertible Preferred Shares ("Preferred Shares") to Pioneer Common Stock as if such transaction had occurred on the dates presented. In accordance with the provisions of APB 16 the Transaction has been accounted for as a purchase of Chauvco by Pioneer and the Parker/Mesa Merger have been accounted for as a purchase of Mesa by Pioneer. The unaudited pro forma combined statements of operations of Pioneer for the six months ended June 30, 1997 and for the year ended December 31, 1996 have been prepared to give effect to the Transaction, Parker/Mesa Merger and certain events described below for Pioneer, Chauvco and Mesa as if the Transaction, Parker/Mesa Merger and such events had occurred on January 1, 1996. Pro Forma Pioneer has been prepared to give effect to the acquisition of Pro Forma Mesa by Adjusted Pioneer, both as defined below. Pro Forma Chauvco has been prepared to give effect to the distribution of CRI Shares and the rights to the Alliance pipeline to Chauvco's Shareholders. Adjusted Pioneer has been prepared to give effect to (i) the sale of certain wholly-owned Australian subsidiaries in March 1996 and the sale of Bridge Oil Timor Sea, Inc. in June 1996 (collectively, the "Australasian Assets Sold"), (ii) the aggregate effect of the sale of certain nonstrategic domestic oil and gas properties, gas plants, contract rights and related assets sold during the period from January 2, 1996 to December 31, 1996 (collectively, the "1996 Assets Sold") and (iii) the exchange of Pioneer's Preferred Shares for Pioneer Common Stock in August 1997. Pro Forma Mesa has been prepared to give effect to the Recapitalization (see Note 2 of Mesa's Notes to Consolidated Financial Statements included herein), which entailed issuing $265 million in new preferred equity and repaying and refinancing substantially all of Mesa's $1.2 billion of then existing long-term debt, and the Greenhill Acquisition, including additional borrowings to finance such acquisition. The historical consolidated financial statements for Chauvco and CRI were prepared under Canadian GAAP and in Canadian dollars. For these unaudited pro forma combined financial statements, the historical financial information of Chauvco, CRI and the Alliance pipeline project have been converted to U.S. dollars using the period end exchange rate for the balance sheets and the average exchange rate for the statements of operations for the respective periods. These unaudited pro forma combined financial statements also contain certain adjustments to conform the historical Chauvco financial statements to U.S. GAAP and successful efforts method of accounting as used by Pioneer after eliminating the balances or activity associated with CRI and the Alliance pipeline. In addition, certain reclassifications have been made to Chauvco's historical consolidated financial statements to conform to Pioneer's financial statement presentation. The unaudited pro forma combined financial statements included herein are not necessarily indicative of the results that might have occurred had the transactions taken place at the beginning of the period specified and are not intended to be a projection of future results. In addition, future results may vary significantly from the results reflected in the accompanying unaudited pro forma combined financial statements because of normal production declines, changes in product prices, future acquisitions and divestitures, future development and exploration activities, and other factors. The following unaudited pro forma combined financial statements should be read in conjunction with (i) the Consolidated Financial Statements (and the related notes) of both Pioneer and Mesa included elsewhere herein for the six months ended June 30, 1997 and for the five-year period ended December 31, 1996 and (ii) the Consolidated Financial Statements (and the related notes) of Chauvco for the six months ended June 30, 1997 and for the three-year period ended December 31, 1996. F-4 215 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA PRO FORMA COMBINED PRO FORMA PIONEER CHAUVCO ADJUSTMENTS COMBINED ---------- --------- ----------- ---------- Current assets: Cash and cash equivalents................. $ 10,594 $ -- $ 10,594 Restricted cash........................... 1,723 -- 1,723 Accounts receivable....................... 116,087 30,028 146,115 Inventories............................... 8,711 1,875 10,586 Deferred income taxes..................... 9,300 -- 9,300 Other current assets...................... 3,829 781 4,610 ---------- --------- ---------- Total current assets.............. 150,244 32,684 182,928 ---------- --------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties...................... 3,842,288 756,223 (91,699)(a) 4,506,812 Unproved properties.................... 85,071 34,530 809,988(a) 929,589 Natural gas processing facilities......... 50,770 -- 50,770 Accumulated depletion, depreciation and amortization........................... (489,143) (298,028) 298,028(a) (489,143) ---------- --------- ---------- 3,488,986 492,725 4,998,028 ---------- --------- ---------- Other property and equipment, net........... 39,838 5,515 45,353 Other assets, net........................... 57,691 19,906 77,597 ---------- --------- ---------- $3,736,759 $ 550,830 $5,303,906 ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...... $ 11,369 $ 5,863 $ 17,232 Undistributed unit purchases.............. 1,723 -- 1,723 Accounts payable.......................... 94,825 20,652 115,477 Domestic and foreign income taxes......... 2,038 (215) 1,823 Other current liabilities................. 38,173 -- 38,173 ---------- --------- ---------- Total current liabilities......... 148,128 26,300 174,428 ---------- --------- ---------- Long-term debt, less current maturities..... 1,535,995 207,039.. 20,000(a) 1,763,034 Other noncurrent liabilities................ 122,368 5,769 128,137 Deferred income taxes....................... 212,870 51,972 306,256(a) 571,098 Stockholders' equity: Common stock.............................. 736 114,028 (113,803)(a) 961 Additional paid-in capital................ 1,592,895 -- 949,586(a) 2,542,481 Unearned compensation..................... (712) -- (712) Retained earnings......................... 124,479 145,722 (145,722)(a) 124,479 ---------- --------- ---------- Total stockholders' equity........ 1,717,398 259,750 2,667,209 ---------- --------- ---------- Commitments and contingencies............... ---------- --------- ---------- $3,736,759 $ 550,830 $5,303,906 ========== ========= ==========
See accompanying notes to unaudited pro forma combined financial statements. F-5 216 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA PRO FORMA COMBINED PRO FORMA PIONEER CHAUVCO ADJUSTMENTS COMBINED ---------- --------- ----------- ---------- Current assets: Cash and cash equivalents................. $ 16,296 $ 644 $ 16,940 Restricted cash........................... 1,749 -- 1,749 Accounts receivable....................... 154,285 26,175 180,460 Inventories............................... 6,378 1,683 8,061 Deferred income taxes..................... 7,400 -- 7,400 Other current assets...................... 4,972 1,225 6,197 ---------- --------- ---------- Total current assets.............. 191,080 29,727 220,807 ---------- --------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties...................... 3,689,764 648,414 16,110(a) 4,354,288 Unproved properties.................... 51,331 32,373 653,307(a) 737,011 Natural gas processing facilities......... 59,276 -- 59,276 Accumulated depletion, depreciation and amortization........................... (445,238) (274,945) 274,945(a) (445,238) ---------- --------- ---------- 3,355,133 405,842 4,705,337 ---------- --------- ---------- Other property and equipment, net........... 41,743 5,618 47,361 Other assets, net........................... 73,844 13,581 87,425 ---------- --------- ---------- $3,661,800 $ 454,768 $5,060,930 ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...... $ 10,976 $ 2,003 $ 12,979 Undistributed unit purchases.............. 1,749 -- 1,749 Accounts payable.......................... 109,147 21,655 130,802 Domestic and foreign income taxes......... 1,743 2,919 4,662 Other current liabilities................. 46,980 -- 46,980 ---------- --------- ---------- Total current liabilities......... 170,595 26,577 197,172 ---------- --------- ---------- Long-term debt, less current maturities..... 1,485,446 92,874 20,000(a) 1,598,320 Other noncurrent liabilities................ 99,207 4,291 103,498 Deferred income taxes....................... 213,878 43,793 261,784(a) 519,455 Stockholders' equity: Common stock.............................. 736 154,305 (154,080)(a) 961 Additional paid-in capital................ 1,593,356 -- 949,586(a) 2,542,942 Unearned compensation..................... (1,625) -- (1,625) Retained earnings......................... 100,207 132,928 (132,928)(a) 100,207 ---------- --------- ---------- Total stockholders' equity........ 1,692,674 287,233 2,642,485 ---------- --------- ---------- Commitments and contingencies............... ---------- --------- ---------- $3,661,800 $ 454,768 $5,060,930 ========== ========= ==========
See accompanying notes to unaudited pro forma combined financial statements. F-6 217 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA COMBINED PRO FORMA PIONEER CHAUVCO ADJUSTMENTS COMBINED --------- ------- ----------- --------- Revenues: Oil and gas.................................. $384,192 $73,312 $457,504 Natural gas processing....................... 11,819 -- 11,819 Interest and other........................... 4,812 744 5,556 Gain on disposition of assets, net........... 2,655 -- 2,655 -------- ------- -------- 403,478 74,056 477,534 -------- ------- -------- Cost and expenses: Oil and gas production....................... 106,490 19,192 125,682 Natural gas processing....................... 6,098 -- 6,098 Depletion, depreciation and amortization..... 162,587 27,522 4,980(b) 195,089 Impairment of long-lived assets.............. 2,907 -- 2,907 Exploration and abandonments................. 30,134 -- 4,834(c) 34,968 General and administrative................... 37,992 4,305 5,450(d) 47,747 Interest..................................... 65,346 4,442 565(e) 70,353 Other........................................ 3,301 -- 3,301 -------- ------- -------- 414,855 55,461 486,145 -------- ------- -------- Income (loss) from continuing operations before income taxes................................. (11,377) 18,595 (8,611) Income tax benefit (provision)................. 4,200 (4,656) 3,856(f) 3,400 -------- ------- -------- Income (loss) from continuing operations....... $ (7,177) $13,939 $ (5,211) ======== ======= ======== Income (loss) per share........................ $ (.10) $ .29 $ (.05) ======== ======= ======== Weighted average shares outstanding............ 73,945 48,401 (25,878)(g) 96,468 ======== ======= ========
See accompanying notes to unaudited pro forma combined financial statements. F-7 218 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA COMBINED PRO FORMA PIONEER CHAUVCO ADJUSTMENTS COMBINED --------- -------- ----------- --------- Revenues: Oil and gas.............................. $751,806 $129,833 $881,639 Natural gas processing................... 23,184 -- 23,184 Interest and other....................... 42,038 381 42,419 Gain on disposition of assets, net....... 11,966 -- 11,966 -------- -------- -------- 828,994 130,214 959,208 -------- -------- -------- Cost and expenses: Oil and gas production................... 196,014 34,145 230,159 Natural gas processing................... 11,949 -- 11,949 Depletion, depreciation and amortization.......................... 317,991 48,657 12,200(b) 378,848 Exploration and abandonments............. 32,128 -- 5,427(c) 37,555 General and administrative............... 68,478 7,469 8,008(d) 83,955 Interest................................. 128,401 8,313 1,244(e) 137,958 Other.................................... 4,791 -- 4,791 -------- -------- -------- 759,752 98,584 885,215 -------- -------- -------- Income from continuing operations before income taxes............................. 69,242 31,630 73,993 Income tax provision....................... (25,600) (6,612) 5,212(f) (27,000) -------- -------- -------- Income from continuing operations.......... $ 43,642 $ 25,018 $ 46,993 ======== ======== ======== Income per share........................... $ .59 $ .52 $ .49 ======== ======== ======== Weighted average shares outstanding........ 74,246 48,300 (25,777)(g) 96,769 ======== ======== ========
See accompanying notes to unaudited pro forma combined financial statements. F-8 219 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS) ASSETS
PRO FORMA PIONEER MESA ADJUSTMENTS PIONEER ---------- ---------- ----------- ---------- Current assets: Cash and cash equivalents.................... $ 9,843 $ 20,751 (20,000)(h) $ 10,594 Restricted cash.............................. 1,723 -- 1,723 Accounts receivable.......................... 71,010 45,077 116,087 Inventories.................................. 5,581 3,130 8,711 Deferred income taxes........................ 9,300 -- 9,300 Other current assets......................... 1,955 1,874 3,829 ---------- ---------- ---------- Total current assets.................. 99,412 70,832 150,244 ---------- ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.......................... 1,536,665 2,293,133 12,490(h) 3,842,288 Unproved properties........................ 41,071 44,000 85,071 Natural gas processing facilities............ 50,770 -- 50,770 Accumulated depletion, depreciation and amortization............................... (489,143) (996,687) 996,687(h) (489,143) ---------- ---------- ---------- 1,139,363 1,340,446 3,488,986 ---------- ---------- ---------- Other property and equipment, net.............. 28,552 11,286 39,838 Other assets, net.............................. 16,175 82,894 (35,516)(h) 57,691 (5,862)(i) ---------- ---------- ---------- $1,283,502 $1,505,458 $3,736,759 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt......... $ 6,064 $ 5,305 $ 11,369 Undistributed unit purchases................. 1,723 -- 1,723 Accounts payable............................. 64,616 30,209 94,825 Domestic and foreign income taxes............ 2,038 -- 2,038 Other current liabilities.................... 14,737 23,436 38,173 ---------- ---------- ---------- Total current liabilities............. 89,178 58,950 148,128 ---------- ---------- ---------- Long-term debt, less current maturities........ 349,457 1,102,999 83,539(h) 1,535,995 Other noncurrent liabilities................... 27,336 80,032 15,000(h) 122,368 Deferred income taxes.......................... 73,800 -- 139,070(h) 212,870 Preferred stock of subsidiary.................. 188,820 -- (188,820)(i) -- Stockholders' equity: Preferred stock.............................. -- 1,266 (1,266)(h) -- Common stock................................. 370 643 (344)(h) 736 67(i) Additional paid-in capital................... 465,234 667,860 276,910(h) 1,592,895 182,891(i) Treasury stock, at cost...................... (34,460) -- 34,460(h) -- Unearned compensation........................ (712) -- (712) Retained earnings (deficit).................. 124,479 (406,292) 406,292(h) 124,479 ---------- ---------- ---------- Total stockholders' equity............ 554,911 263,477 1,717,398 ---------- ---------- ---------- Commitments and contingencies ---------- ---------- ---------- $1,283,502 $1,505,458 $3,736,759 ========== ========== ==========
See accompanying notes to unaudited pro forma combined financial statements. F-9 220 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1996 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA PIONEER MESA GREENHILL ADJUSTMENTS PIONEER ---------- ---------- --------- ----------- ----------- Current assets: Cash and cash equivalents.............. $ 18,711 $ 16,681 $ 8,904 (20,000)(h) $ 16,296 (8,000)(j) Restricted cash........................ 1,749 -- -- 1,749 Accounts receivable.................... 82,968 63,410 7,907 154,285 Inventories............................ 3,644 2,159 575 6,378 Deferred income taxes.................. 7,400 -- -- 7,400 Other current assets................... 2,567 2,027 378 4,972 ---------- ---------- -------- ----------- Total current assets............ 117,039 84,277 17,764 191,080 ---------- ---------- -------- ----------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................... 1,419,051 1,975,684 346,329 71,645(h) 3,689,764 (122,945)(j) Unproved properties.................. 7,331 -- -- 44,000(j) 51,331 Natural gas processing facilities...... 59,276 -- -- 59,276 Accumulated depletion, depreciation and amortization......................... (445,238) (941,266) (182,977) 941,266(h) (445,238) 182,977(j) ---------- ---------- -------- ----------- 1,040,420 1,034,418 163,352 3,355,133 ---------- ---------- -------- ----------- Other property and equipment, net........ 27,779 11,966 1,998 41,743 Other assets, net........................ 14,627 83,218 2 (18,032)(h) 73,844 (5,971)(i) ---------- ---------- -------- ----------- $1,199,865 $1,213,879 $183,116 $ 3,661,800 ========== ========== ======== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt... $ 5,381 $ 5,305 $ 290 $ 10,976 Undistributed unit purchases........... 1,749 -- -- 1,749 Accounts payable....................... 64,241 43,045 1,861 109,147 Domestic and foreign income taxes...... 1,743 -- -- 1,743 Other current liabilities.............. 17,856 21,150 7,974 46,980 ---------- ---------- -------- ----------- Total current liabilities....... 90,970 69,500 10,125 170,595 ---------- ---------- -------- ----------- Long-term debt, less current maturities............................. 320,908 802,772 -- 92,766(h) 1,485,446 269,000(j) Other noncurrent liabilities............. 8,071 76,113 23 15,000(h) 99,207 Deferred income taxes.................... 60,800 -- -- 153,078(h) 213,878 Preferred stock of subsidiary............ 188,820 -- -- (188,820)(i) -- Stockholders' equity: Preferred stock........................ -- 1,216 -- (1,216)(h) -- Common stock........................... 369 643 2 (344)(h) 735 (2)(j) 67(i) Additional paid-in capital............. 462,873 656,805 206,000 290,897(h) 1,593,357 (206,000)(j) 182,782(i) Treasury stock, at cost................ (31,528) -- -- 31,528(h) -- Unearned compensation.................. (1,625) -- -- (1,625) Retained earnings (deficit)............ 100,207 (393,170) (33,034) 393,170(h) 100,207 33,034(j) ---------- ---------- -------- ----------- Total stockholders' equity...... 530,296 265,494 172,968 1,692,674 ---------- ---------- -------- ----------- Commitments and contingencies............ ---------- ---------- -------- ----------- $1,199,865 $1,213,879 $183,116 $ 3,661,800 ========== ========== ======== ===========
See accompanying notes to unaudited pro forma combined financial statements. F-10 221 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA PIONEER MESA GREENHILL ADJUSTMENTS PIONEER -------- -------- --------- ----------- --------- Revenues: Oil and gas.......................... $198,626 $168,197 $ 17,369 $384,192 Natural gas processing............... 11,819 -- -- 11,819 Interest and other................... 2,833 1,832 147 4,812 Gain (loss) on disposition of assets, net............................... 2,637 (23) 41 2,655 -------- -------- -------- -------- 215,915 170,006 17,557 403,478 -------- -------- -------- -------- Cost and expenses: Oil and gas production............... 55,392 44,457 6,641 106,490 Natural gas processing............... 6,098 -- -- 6,098 Depletion, depreciation and amortization...................... 59,509 56,510 7,725 38,843(b) 162,587 Impairment of long-lived assets...... -- 2,907 -- 2,907 Exploration and abandonments......... 18,415 8,067 4,059 (407)(k) 30,134 General and administrative........... 14,990 9,277 13,318 407(k) 37,992 Interest............................. 20,154 48,335 -- (6,010)(i) 65,346 (2,562)(l) 5,429(m) Other................................ 831 2,470 -- 3,301 -------- -------- -------- -------- 175,389 172,023 31,743 414,855 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes....... 40,526 (2,017) (14,186) (11,377) Income tax benefit (provision)......... (14,500) -- -- 18,700(f) 4,200 -------- -------- -------- -------- Income (loss) from continuing operations........................... 26,026 (2,017) (14,186) (7,177) Dividends on preferred stock........... -- (11,105) -- 11,105(n) -- -------- -------- -------- -------- Income (loss) from continuing operations attributable to common stock................................ $ 26,026 $(13,122) $(14,186) $ (7,177) ======== ======== ======== ======== Income (loss) per common share......... $ .74 $ (.20) $ (.10) ======== ======== ======== Weighted average shares outstanding.... 35,364 65,499 (33,632)(o) 73,945 6,714(i) ======== ======== ========
See accompanying notes to unaudited pro forma combined financial statements. F-11 222 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
ADJUSTED PRO FORMA PRO FORMA PRO FORMA PIONEER MESA ADJUSTMENTS PIONEER -------- --------- ----------- --------- Revenues: Oil and gas..................................... $374,560 $377,246 $751,806 Natural gas processing.......................... 23,184 -- 23,184 Interest and other.............................. 17,328 24,710 42,038 Gain on disposition of assets, net.............. -- 11,966 11,966 -------- -------- -------- 415,072 413,922 828,994 -------- -------- -------- Cost and expenses: Oil and gas production.......................... 101,545 94,469 196,014 Natural gas processing.......................... 11,949 -- 11,949 Depletion, depreciation and amortization........ 104,629 135,289 78,073(b) 317,991 Exploration and abandonments.................... 20,187 12,772 (831)(k) 32,128 General and administrative...................... 26,631 41,016 831(k) 68,478 Interest........................................ 28,700 105,266 (5,565)(l) 128,401 Other........................................... 2,451 2,340 4,791 -------- -------- -------- 296,092 391,152 759,752 -------- -------- -------- Income from continuing operations before income taxes.................................... 118,980 22,770 69,242 Income tax provision.............................. (41,600) -- 16,000(f) (25,600) -------- -------- -------- Income from continuing operations................. 77,380 22,770 43,642 Dividends on preferred stock...................... -- (21,880) 21,880(n) -- -------- -------- -------- Income from continuing operations attributable to common stock.................................... $ 77,380 $ 890 $ 43,642 ======== ======== ======== Income per common share........................... $ 1.82 $ .01 $ .59 ======== ======== ======== Weighted average shares outstanding............... 42,448 64,164 (32,366)(o) 74,246 ======== ======== ========
See accompanying notes to unaudited pro forma combined financial statements. F-12 223 PIONEER NATURAL RESOURCES COMPANY UNAUDITED PRO FORMA ADJUSTED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
AUSTRALASIAN 1996 ASSETS ASSETS PRO FORMA ADJUSTED PIONEER SOLD SOLD ADJUSTMENTS PIONEER -------- ------------ -------- ----------- -------- Revenues: Oil and gas......................... $396,931 $(10,591) $(11,780) $374,560 Natural gas processing.............. 23,814 -- (630) 23,184 Interest and other.................. 17,458 (130) -- 17,328 Gain on disposition of assets, net.............................. 97,140 (83,260) (13,880) -- -------- -------- -------- -------- 535,343 (93,981) (26,290) 415,072 -------- -------- -------- -------- Cost and expenses: Oil and gas production.............. 110,334 (3,300) (5,489) 101,545 Natural gas processing.............. 12,528 -- (579) 11,949 Depletion, depreciation and amortization..................... 112,134 (4,217) (3,288) 104,629 Exploration and abandonments........ 23,030 (1,435) (1,408) 20,187 General and administrative.......... 28,363 (1,732) -- 26,631 Interest............................ 46,155 (1,100) -- (12,020)(i) 28,700 (4,335)(p) Other............................... 2,451 -- -- 2,451 -------- -------- -------- -------- 334,995 (11,784) (10,764) 296,092 -------- -------- -------- -------- Income from continuing operations before income taxes................. 200,348 (82,197) (15,526) 118,980 Income tax provision.................. (60,100) 16,000 5,400 (2,900)(f) (41,600) -------- -------- -------- -------- Income from continuing operations..... $140,248 $(66,197) $(10,126) $ 77,380 ======== ======== ======== ======== Income per share...................... $ 3.92 $ 1.82 ======== ======== Weighted average shares outstanding... 35,734 6,714(i) 42,448 ======== ========
See accompanying notes to unaudited pro forma combined financial statements. F-13 224 MESA INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA MESA RECAPITALIZATION GREENHILL ADJUSTMENTS MESA -------- ---------------- --------- ----------- --------- Revenues: Oil and gas...................... $306,302 $ -- $70,944 $377,246 Natural gas processing........... -- -- -- -- Interest and other............... 24,710 -- -- 24,710 Gain on disposition of assets, net........................... 11,966 -- -- 11,966 -------- -------- ------- -------- 342,978 -- 70,944 413,922 -------- -------- ------- -------- Cost and expenses: Oil and gas production........... 71,370 -- 23,099 94,469 Natural gas processing........... -- -- -- -- Depletion, depreciation and amortization.................. 103,301 -- 29,355 2,633(b) 135,289 Exploration and abandonments..... 5,431 -- 7,341 12,772 General and administrative....... 31,473 -- 9,543 41,016 Interest......................... 121,135 (34,530)(q) (729) 19,390(m) 105,266 Other............................ 1,929 -- 411 2,340 -------- -------- ------- -------- 334,639 (34,530) 69,020 391,152 -------- -------- ------- -------- Income from continuing operations before income taxes.............. 8,339 34,530 1,924 22,770 Income tax provision............... -- -- -- -- -------- -------- ------- -------- Income from continuing operations....................... 8,339 34,530 1,924 22,770 Dividends on preferred stock....... (9,522) (12,358)(r) -- (21,880) -------- -------- ------- -------- Income (loss) from continuing operations attributable to common stock............................ $ (1,183) $ 22,172 $ 1,924 $ 890 ======== ======== ======= ======== Income (loss) per common share..... $ (.02) $ .01 ======== ======== Weighted average shares outstanding...................... 64,164 64,164 ======== ========
See accompanying notes to unaudited pro forma combined financial statements. F-14 225 CHAUVCO RESOURCES LTD. UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA CHAUVCO CRI ALLIANCE ADJUSTMENTS CHAUVCO --------- -------- -------- ----------- --------- Current assets: Cash and cash equivalents........... $ 4,110 $ (5,096) $ -- 986(s) $ -- Accounts receivable................. 24,155 (1,277) 7,150 30,028 Inventories......................... 1,875 -- -- 1,875 Other current assets................ 1,737 (956) -- 781 --------- -------- ------- -------- Total current assets........ 31,877 (7,329) 7,150 32,684 --------- -------- ------- -------- Oil and gas properties, using the full cost method of accounting........... 834,664 (43,911) -- 790,753 Accumulated depletion, depreciation and amortization.................... (298,028) -- -- (298,028) --------- -------- ------- -------- 536,636 (43,911) -- 492,725 --------- -------- ------- -------- Other property and equipment, net..... 5,791 (276) -- 5,515 Other assets, net..................... 27,056 -- (7,150) 19,906 --------- -------- ------- -------- $ 601,360 $(51,516) $ -- $550,830 ========= ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt............................. $ 5,863 $ -- $ $ 5,863 Accounts payable.................... 27,186 (7,520) -- 986(s) 20,652 Domestic and foreign income taxes... (215) -- -- (215) --------- -------- ------- -------- Total current liabilities... 32,834 (7,520) -- 26,300 --------- -------- ------- -------- Long-term debt, less current maturities.......................... 207,039 -- -- 207,039 Other noncurrent liabilities.......... 6,909 (1,140) -- 5,769 Deferred income taxes................. 51,972 -- -- 51,972 Stockholders' equity: Common stock........................ 156,884 (42,856) -- 114,028 Retained earnings................... 145,722 -- -- 145,722 --------- -------- ------- -------- Total stockholders' equity.................... 302,606 (42,856) -- 259,750 --------- -------- ------- -------- Commitments and contingencies......... --------- -------- ------- -------- $ 601,360 $(51,516) $ -- $550,830 ========= ======== ======= ========
See accompanying notes to unaudited pro forma combined financial statements. F-15 226 CHAUVCO RESOURCES LTD. UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1996 (IN THOUSANDS) ASSETS
PRO FORMA PRO FORMA CHAUVCO CRI ALLIANCE ADJUSTMENTS CHAUVCO --------- -------- -------- ----------- --------- Current assets: Cash and cash equivalents........... $ 708 $(39,755) $ -- 39,691(s) $ 644 Accounts receivable................. 25,516 (909) 1,568 26,175 Inventories......................... 1,683 -- -- 1,683 Other current assets................ 1,240 (15) -- 1,225 --------- -------- ------- --------- Total current assets........ 29,147 (40,679) 1,568 29,727 --------- -------- ------- --------- Oil and gas properties, using the full cost method of accounting........... 690,341 (9,554) -- 680,787 Accumulated depletion, depreciation and amortization.................... (274,945) -- -- (274,945) --------- -------- ------- --------- 415,396 (9,554) -- 405,842 --------- -------- ------- --------- Other property and equipment, net..... 5,700 (82) -- 5,618 Other assets, net..................... 15,149 -- (1,568) 13,581 --------- -------- ------- --------- $ 465,392 $(50,315) $ -- $ 454,768 ========= ======== ======= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt............................. $ 2,003 $ -- $ -- $ 2,003 Accounts payable.................... 27,974 (6,319) -- 21,655 Domestic and foreign income taxes... 2,919 -- -- 2,919 --------- -------- ------- --------- Total current liabilities... 32,896 (6,319) -- 26,577 --------- -------- ------- --------- Long-term debt, less current maturities.......................... 92,874 -- -- 92,874 Other noncurrent liabilities.......... 5,431 (1,140) -- 4,291 Deferred income taxes................. 43,793 -- -- 43,793 Stockholders' equity: Common stock........................ 157,470 (42,856) -- 39,691(s) 154,305 Retained earnings................... 132,928 -- -- 132,928 --------- -------- ------- --------- Total stockholders' equity.................... 290,398 (42,856) -- 287,233 --------- -------- ------- --------- Commitments and contingencies......... --------- -------- ------- --------- $ 465,392 $(50,315) $ -- $ 454,768 ========= ======== ======= =========
See accompanying notes to unaudited pro forma combined financial statements. F-16 227 PIONEER NATURAL RESOURCES COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS JUNE 30, 1997 AND DECEMBER 31, 1996 NOTE 1. BASIS OF PRESENTATION Acquisition of Chauvco. In accordance with the Combination Agreement, holders of Chauvco Common Shares will receive for each Chauvco Common Share held (i) one CRI Share and (ii) in certain cases, at the election of a Chauvco Shareholder, either the number of shares of Pioneer Common Stock or Exchangeable Shares, or a combination of both, determined by multiplying each Chauvco Common Share held by the Exchange Ratio. The Exchange Ratio is dependent upon the Pioneer Stock Price, which will be the average closing sales price per share of Pioneer Common Stock over the ten consecutive trading days ending the third trading day next preceding the date of the Chauvco Meeting. The Exchangeable Shares entitle the holders to dividend and other rights economically equivalent to those of Pioneer Common Stock and, through a voting trust, the right to vote at meetings of Pioneer Stockholders. The range of possible Exchange Ratios to be utilized to determine the numbers of shares of Pioneer Common Stock or Exchangeable Shares, or a combination of both, to be exchanged for one Chauvco Common Share is described below: A. If the Pioneer Stock Price is less than $33.50 the Exchange Ratio is .493827. B. If the Pioneer Stock Price is at least $33.50 but less than $39.01 the Exchange Ratio is the product of the following computation: Exchange Ratio = (.493827 - (((Pioneer Stock Price - 33.50)/5.51) X .042360)). C. If the Pioneer Stock Price is equal to or greater than $39.01 the Exchange Ratio is .451467. In lieu of fractional shares of Pioneer Common Stock or Exchangeable Shares, each holder of a Chauvco Common Share who otherwise would be entitled to receive such fractional share will receive an amount of cash, without interest, equal to the product of such fractional interest multiplied by the Pioneer Stock Price converted to Canadian dollars using the noon spot rate of exchange of U.S. dollars to Canadian dollars announced by the Bank of Canada on the day preceding the date of calculation. The Combination Agreement also provides that, if the Exchange Ratio is above .465116, Pioneer may elect to deliver, in lieu of Pioneer Common Stock or Exchangeable Shares, a number of shares of Pioneer Common Stock or Exchangeable Shares for each Chauvco Common Share equal to the Exchange Ratio of .465115 and an amount of cash per Chauvco Common Share equal to the product of (i) the Pioneer Stock Price multiplied by the noon spot rate of exchange of U.S. dollars and Canadian dollars announced by the Bank of Canada on the day preceding the date of calculation for the exchange and (ii) the Exchange Ratio as calculated above in A. or B. less .465116. The value of Pioneer Common Stock for use in determining the aggregate purchase consideration allocated to the acquired assets and liabilities of Chauvco ("Consideration") will be either (i) the average trading price of Pioneer Common Stock during the seven days surrounding the announcement of the Transaction (the "Seven Day Average") or (ii) the market price of Pioneer common stock on the date of the Chauvco Meeting. If the Pioneer Stock Price is equal to or greater than $39.01, the Consideration will be based upon the Seven Day Average of $42.17. However, if the Pioneer Stock Price is below $39.01, the value for use in determining the Consideration will be the market price of Pioneer Common Stock on the date of the Chauvco Meeting. The unaudited pro forma combined financial statements have been prepared under the assumption that the Consideration will be based on the Seven Day Average of $42.17. See Note 5 for a sensitivity analysis should a decline in the Pioneer Stock Price occur. The historical consolidated financial statements for Chauvco and CRI were prepared under Canadian GAAP and in Canadian dollars. For these unaudited pro forma financial statements, the historical financial information of Chauvco, CRI and the Alliance pipeline project have been converted to U.S. dollars using the period end exchange rate for the balance sheet and the average exchange rate for the statement of operations. These unaudited pro forma financial statements also contain certain adjustments to conform the historical F-17 228 PIONEER NATURAL RESOURCES COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Chauvco financial statements to U.S. GAAP after eliminating the balances or activity associated with CRI and the Alliance pipeline. In addition, certain reclassifications have been made to Chauvco's historical consolidated financial statements to conform to Pioneer's financial statement presentation. Acquisition of Mesa. In accordance with the Merger Agreement, (i) holders of Parker & Parsley common stock received one share of Pioneer common stock for each share held; (ii) holders of Mesa common stock received one share of Pioneer common stock for every seven shares held; and (iii) holders of Mesa Series A Preferred Stock and Mesa Series B Preferred Stock received 1.25 shares of Pioneer common stock for every seven shares held. No fractional shares were issued and all treasury shares were canceled. Description of Pro Forma Financial Statements. The unaudited pro forma combined balance sheets of Pioneer as of June 30, 1997 and December 31, 1996 have been prepared to give effect to the Transaction, the Parker/Mesa Merger and the exchange of Pioneer's Preferred Shares to Pioneer Common Stock as if such transactions had occurred on the balance sheet dates presented. In accordance with the provisions of APB No. 16, "Business Combinations", the Transaction has been accounted for as a purchase of Chauvco by Pioneer and the Parker/Mesa Merger have been accounted for as a purchase of Mesa by Pioneer. The unaudited pro forma combined statements of operations of Pioneer for the six months ended June 30, 1997 and for the year ended December 31, 1996 have been prepared to give effect to the Transaction and the Parker/Mesa Merger and certain events described below for Pioneer, Chauvco and Mesa as if the Transaction, the Parker/Mesa Merger and such events had occurred on January 1, 1996. Pro Forma Pioneer has been prepared to give effect to the acquisition of Pro Forma Mesa by Adjusted Pioneer, both as defined below. Pro Forma Chauvco has been prepared to give effect to the distribution of CRI Shares and the rights to the Alliance pipeline to the Chauvco Shareholders. Adjusted Pioneer has been prepared to give effect to the sale of the Australasian Assets Sold, the 1996 Assets Sold and the exchange of Pioneer's Preferred Shares to Pioneer Common Stock. Pro Forma Mesa has been prepared to give effect to the Recapitalization and the Greenhill Acquisition, including additional borrowings to finance such acquisition. The following is a description of the individual columns included in these unaudited pro forma combined financial statements: Pioneer -- Represents the consolidated balance sheets of Pioneer as of June 30, 1997 and December 31, 1996 and the consolidated statements of operations of Pioneer for the six months ended June 30, 1997 and for the year ended December 31, 1996. Australasian Assets Sold -- Reflects the results of operations for the year ended December 31, 1996 from certain wholly-owned subsidiaries prior to their sale in 1996. On March 28, 1996, Pioneer completed the sale of certain wholly-owned subsidiaries to Santos Ltd., and on June 20, 1996, Pioneer completed the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea, Inc., to Phillips Petroleum International Investment Company. During the year ended December 31, 1996, Pioneer received aggregate consideration of $237.5 million for these combined sales. The assets sold to Santos Ltd. consisted primarily of properties located in the Cooper Basin in Central Australia, the Surat Basin in Northeast Australia, the Carnarvon Basin on the Northwest Shelf off the coast of Western Australia, the Otway Basin off the coast of Southeast Australia and the Central Sumatra Basin in Indonesia. At December 31, 1995, Pioneer's interests in these properties contained 32.1 million BOE of proved reserves (consisting of 12.4 million Bbls of oil and 118.3 Bcf of gas), representing $133.8 million of SEC PV 10 value. Prior to their sale in 1996, these properties produced 249,500 Bbls of oil and 1,927,000 Mcf of gas. Pioneer received an average price of $19.55 per Bbl of oil and $1.95 per Mcf of gas from such production and incurred F-18 229 PIONEER NATURAL RESOURCES COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) production costs per BOE of $4.92 and depletion expense per BOE of $5.84 related to these properties. The wholly-owned subsidiary sold to Phillips Petroleum International Investment Company, Bridge Oil Timor Sea, Inc., has a wholly owned subsidiary, Bridge Oil Timor Sea Pty Ltd., which owns a 22.5% interest in the ZOCA 91-13 permit in the offshore Bonapart Basin in the Zone of Cooperation between Australia and Indonesia. 1996 Assets Sold -- Reflects the results of operations for the year ended December 31, 1996 from certain oil and gas properties, gas plants, contract rights and related assets prior to their sale in 1996. During the year ended December 31, 1996, Pioneer sold certain domestic nonstrategic oil and gas properties, gas plants and other related assets for aggregate proceeds of approximately $58.4 million. Prior to their sale in 1996, these oil and gas properties produced 274,314 Bbls of oil and 3,196,093 Mcf of gas. Pioneer received an average price of $19.30 per Bbl of oil and $2.03 per Mcf of gas from such production and incurred production costs per BOE of $6.80 and depletion expense per BOE of $4.04 related to these properties. Mesa -- Represents the consolidated balance sheets of Mesa as of June 30, 1997 and December 31, 1996 and the consolidated statements of operations of Mesa for the six months ended June 30, 1997 and for the year ended December 31, 1996. Recapitalization -- Represents the effects on Mesa's unaudited pro forma combined statement of operations from the Recapitalization as if it had occurred on January 1, 1996. In August 1996, Mesa completed a recapitalization of its balance sheet by issuing new equity and repaying and refinancing substantially all of its then existing long-term debt. The Recapitalization was undertaken by Mesa in an effort to deleverage and recapitalize Mesa through the issuance of additional equity and through the refinancing of substantially all of Mesa's $1.2 billion debt existing prior to the Recapitalization. The Recapitalization provided Mesa with an improved financial condition due to (i) a significant reduction in total debt outstanding, (ii) a reduction in annual cash interest expense of approximately $75 million, (iii) cost savings programs which reduced general and administrative and other overhead expenses by approximately $10 million annually, and (iv) the extension of maturities on Mesa's long-term debt, which eliminated Mesa's then existing liquidity concerns. The Recapitalization included (i) the private placement of shares of a new class of Mesa Series B Preferred Stock for $133 million to DNR -- Mesa Holdings, Inc. ("DNR"), whose sole general partner is Rainwater Inc., a Texas corporation owned by Richard E. Rainwater, (ii) the sale of $132 million of a new class of Mesa Series A Preferred Stock to Mesa's then existing stockholders through a rights offering, (iii) the establishment of a new bank credit facility and (iv) the issuance of two new series of senior subordinated notes. Greenhill -- Represents the unaudited balance sheet of Greenhill as of December 31, 1996 and the unaudited statements of operations of Greenhill prior to its acquisition by Mesa on April 15, 1997 and for the year ended December 31, 1996. Chauvco -- Represents the consolidated balance sheets of Chauvco as of June 30, 1997 and December 31, 1996 and the consolidated statements of operations of Chauvco for the six months ended June 30, 1997 and for the year ended December 31, 1996. The historical consolidated financial statements for Chauvco were prepared under Canadian GAAP and converted to U.S. dollars utilizing the exchange rates of Canadian dollars to U.S. dollars as listed below, which are based upon the noon buying rate in New York City for cable transfers in Canadian dollars, as certified for customer purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"):
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ Balance Sheets............................. .7241 .7301 Statements of Operations................... .7269 .7330
F-19 230 PIONEER NATURAL RESOURCES COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CRI -- Represents the consolidated balance sheets of CRI as of July 31, 1997 and December 31, 1996, which were prepared under Canadian GAAP and in U.S. dollars. CRI was incorporated on July 29, 1997 as a wholly owned subsidiary of Chauvco. See Pro Forma Consolidated Statements of Financial Position of CRI included in Annex A attached hereto. Alliance -- Reflects the investment in the Alliance pipeline project as of June 30, 1997 and December 31, 1996 which were prepared under Canadian GAAP and converted to U.S. dollars utilizing the Noon Buying Rate of .7241 and .7301, respectively. The unaudited pro forma combined statement of operations for the year ended December 31, 1996 presented herein does not reflect the results of operations from Mesa's acquisition from MAPCO Inc. of approximately 11 MMBOE in February 1997 for approximately $66 million. The purchase was funded by additional borrowings under Mesa's credit facility. In addition, the unaudited pro form combined statement of operations for the year ended December 31, 1996 presented herein does not reflect the results of operations from Chauvco's acquisition of Tidal Resources Inc. on January 3, 1997 for approximately $55 million. The purchase was funded by additional borrowings under Chauvco's credit facility. The acquisitions are not presented since they are not considered significant under Rule 3-05 of Regulation S-X. NOTE 2. ACQUISITION OF CHAUVCO The aggregate Pioneer Common Stock purchase consideration, including nonrecurring transaction costs, is computed below in accordance with the Exchange Ratio agreed to in the Combination Agreement at the Seven-Day Average. See Note 5 below for a sensitivity analysis on the aggregate Pioneer consideration assuming a remeasurement date occurs due to a decline of Pioneer's Stock Price below $39.01.
CHAUVCO COMMON CHAUVCO SHARES OPTIONS TOTAL ------------ ----------- ------------ Shares/options outstanding................ 48,606,582 2,725,850 Exchange ratio............................ .451467 .451467 21,944,268 1,230,631 Less: Option Exercise shares (a).......... -- (651,508) ------------ ----------- 21,944,268 579,123 22,523,391 Pioneer shares/Exchangeable Shares to be issued Value of Pioneer common stock (b)..................................... $ 42.17 $ 42.17 $ 42.17 ------------ ----------- ------------ Pioneer common stock consideration........ $925,389,782 $24,421,617 $949,811,399 ------------ ----------- Transaction costs......................... 20,000,000 ------------ Aggregate purchase consideration.......... $969,811,399 ============
- --------------- (a) For Chauvco Optionholders it is assumed that they will elect to reduce the number of shares of Pioneer Common Stock they would otherwise be eligible to receive by the number of shares of Pioneer Common Stock equal to the exercise strike price of their options rather than pay, in cash, their exercise price. The aggregate average exercise strike price for the Chauvco Option is C$13.92. (b) Pioneer Common Stock is valued at $42.17 per share which represents Pioneer Seven-Day Average. F-20 231 PIONEER NATURAL RESOURCES COMPANY NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following table represents the preliminary allocation of the total purchase price of Chauvco to the acquired assets and liabilities of Chauvco. The allocation represents the fair values assigned to each of the significant assets acquired and liabilities assumed. Any future adjustments to the allocation of the purchase price are not anticipated to be material to the unaudited pro forma financial statements.
ALLOCATION OF AGGREGATE PURCHASE CONSIDERATION --------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- (IN THOUSANDS) Net working capital...................................... $ 6,384 $ 3,150 Property, plant and equipment............................ 1,509,042 1,350,204 Other assets............................................. 25,421 19,199 Long-term debt........................................... (207,039) (92,874) Other non-current liabilities, including deferred taxes.................................................. (363,997) (309,868) ---------- ---------- $ 969,811 $ 969,811 ========== ========== Pioneer Common Stock consideration....................... $ 949,811 $ 949,811 Transaction costs........................................ 20,000 20,000 ---------- ---------- Aggregate purchase consideration......................... $ 969,811 $ 969,811 ========== ==========
The following table illustrates the number of shares of Pioneer Common Stock that are estimated to be issued and outstanding upon the consummation of the Transaction:
SHARES/OPTIONS OUTSTANDING AT EXCHANGE PIONEER SHARES/ SEPTEMBER 19, 1997 RATIO EXCHANGEABLE SHARES ------------------ -------- ------------------- Pioneer Common Stock....................... 74,409,380 N/A 74,409,380 Chauvco Common Shares...................... 48,606,582 .451467 21,944,268 Chauvco Options............................ 2,725,850 (a) 579,123 ---------- 96,932,771 ==========
- --------------- (a) For Chauvco Optionholders it is assumed that they will elect to reduce the number of shares of Pioneer Common Stock they would otherwise be eligible to receive by the number of shares of Pioneer Common Stock equal to the exercise strike price of their options rather than pay, in cash, their exercise price. NOTE 3. ACQUISITION OF MESA The aggregate Pioneer Common Stock purchase consideration, including nonrecurring transaction costs, is computed in accordance with the Exchange Ratios agreed to in the Merger Agreement as follows:
MESA MESA SERIES MESA SERIES COMMON A PREFERRED B PREFERRED STOCK