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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________
FORM 10-Q 
______________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ________ to ________                     
Commission File Number: 1-13245
______________________________ 
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
______________________________
Delaware
 
75-2702753
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5205 N. O'Connor Blvd., Suite 200, Irving, Texas
 
75039
(Address of principal executive offices)
 
(Zip Code)
(972) 444-9001
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
______________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes   ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨    No  ý
Number of shares of Common Stock outstanding as of July 25, 2016                               169,607,877


Table of Contents

PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015
 
 
 
 
Consolidated Statement of Equity for the six months ended June 30, 2016
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
Cautionary Statement Concerning Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q (this "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate" or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements, which are generally not historical in nature. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.
These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, completion of planned acquisitions, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to perform the Company's drilling and operating activities, access to and availability of transportation, processing, fractionation and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer's credit facility, investment instruments, derivative contracts and the purchasers of Pioneer's oil, NGL and gas production, uncertainties about estimates of reserves, identification of drilling locations and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impacts of climate change, the risks associated with the ownership and operation of the Company's industrial sand mining and oilfield services businesses, and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the United States Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Part I, Item 1. Business — Competition, Markets and Regulations," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific meanings:
"Bbl" means a standard barrel containing 42 United States gallons.
"BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of gas to one Bbl of oil or natural gas liquid.
"BOEPD" means BOE per day.
"Btu" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
"Conway" means the daily average natural gas liquids components as priced in Oil Price Information Service ("OPIS") in the table "U.S. and Canada LP – Gas Weekly Averages" at Conway, Kansas.
"DD&A" means depletion, depreciation and amortization.
"GAAP" means accounting principles that are generally accepted in the United States of America.
"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.
"Mcf" means one thousand cubic feet and is a measure of gas volume.
"MMBtu" means one million Btus.
"Mont Belvieu" means the daily average natural gas liquids components as priced in OPIS in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
"Pioneer" or the "Company" means Pioneer Natural Resources Company and its subsidiaries.
"Proved reserves" mean the quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons ("LKH") as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil ("HKO") elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
"U.S." means United States.
With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by the Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.
Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
 
June 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,825

 
$
1,391

Short-term investments
 
1,473

 

Accounts receivable:
 
 
 
 
Trade, net
 
434

 
384

Due from affiliates
 

 
1

Income taxes receivable
 
4

 
43

Inventories
 
165

 
155

Prepaid expenses
 
18

 
17

Notes receivable
 
501

 
498

Derivatives
 
273

 
694

Other
 
6

 
11

Total current assets
 
4,699

 
3,194

Property, plant and equipment, at cost:
 
 
 
 
Oil and gas properties, using the successful efforts method of accounting:
 
 
 
 
Proved properties
 
17,546

 
16,631

Unproved properties
 
137

 
169

Accumulated depletion, depreciation and amortization
 
(7,491
)
 
(6,778
)
Total property, plant and equipment
 
10,192

 
10,022

Long-term investments
 
23

 

Goodwill
 
272

 
272

Other property and equipment, net
 
1,525

 
1,523

Derivatives
 
12

 
64

Other, net
 
85

 
79

 
 
$
16,808

 
$
15,154








The financial information included as of June 30, 2016 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in millions, except share data)
 
 
 
June 30,
2016
 
December 31,
2015
 
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
674

 
$
798

Due to affiliates
 
67

 
85

Interest payable
 
84

 
65

Income taxes payable
 

 
2

Current portion of long-term debt
 
939

 
448

Derivatives
 
8

 

Other
 
59

 
64

Total current liabilities
 
1,831

 
1,462

Long-term debt
 
2,725

 
3,207

Derivatives
 
43

 
1

Deferred income taxes
 
1,494

 
1,776

Other liabilities
 
329

 
333

Equity:
 
 
 
 
Common stock, $.01 par value; 500,000,000 shares authorized; 173,187,409 and 152,775,920 shares issued as of June 30, 2016 and December 31, 2015, respectively
 
2

 
2

Additional paid-in capital
 
8,843

 
6,267

Treasury stock at cost: 3,585,628 and 3,396,220 shares as of June 30, 2016 and December 31, 2015, respectively
 
(222
)
 
(199
)
Retained earnings
 
1,756

 
2,298

Total equity attributable to common stockholders
 
10,379

 
8,368

Noncontrolling interests in consolidated subsidiaries
 
7

 
7

Total equity
 
10,386

 
8,375

Commitments and contingencies
 


 


 
 
$
16,808

 
$
15,154








The financial information included as of June 30, 2016 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(Unaudited) 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
613

 
$
596

 
$
1,022

 
$
1,113

Sales of purchased oil and gas
 
395

 
236

 
618

 
339

Interest and other
 
6

 
7

 
13

 
14

Derivative gains (losses), net
 
(229
)
 
(197
)
 
(186
)
 
44

Gain on disposition of assets, net
 
1

 
2

 
3

 
3

 
 
786

 
644

 
1,470

 
1,513

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
141

 
163

 
297

 
343

Production and ad valorem taxes
 
36

 
37

 
65

 
76

Depletion, depreciation and amortization
 
384

 
329

 
737

 
639

Purchased oil and gas
 
410

 
237

 
653

 
345

Impairment of oil and gas properties
 

 

 
32

 
138

Exploration and abandonments
 
18

 
28

 
77

 
54

General and administrative
 
80

 
83

 
154

 
165

Accretion of discount on asset retirement obligations
 
5

 
3

 
9

 
6

Interest
 
56

 
46

 
111

 
92

Other
 
67

 
58

 
154

 
107

 
 
1,197

 
984

 
2,289

 
1,965

Loss from continuing operations before income taxes
 
(411
)
 
(340
)
 
(819
)
 
(452
)
Income tax benefit
 
143

 
123

 
284

 
160

Loss from continuing operations
 
(268
)
 
(217
)
 
(535
)
 
(292
)
Loss from discontinued operations, net of tax
 

 
(1
)
 

 
(4
)
Net loss attributable to common stockholders
 
$
(268
)
 
$
(218
)
 
$
(535
)
 
$
(296
)
 
 
 
 
 
 
 
 
 
Basic and diluted earnings per share attributable to common stockholders:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(1.63
)
 
$
(1.45
)
 
$
(3.28
)
 
$
(1.95
)
Loss from discontinued operations
 

 
(0.01
)
 

 
(0.03
)
Net loss
 
$
(1.63
)
 
$
(1.46
)
 
$
(3.28
)
 
$
(1.98
)
 
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares outstanding
 
164

 
149

 
163

 
149

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$

 
$

 
$
0.04

 
$
0.04



The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(in millions, except share data and dividends per share)
(Unaudited)
 
 
 
 
 
Equity Attributable To Common Stockholders
 
 
 
 
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total Equity
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
 
149,380

 
$
2

 
$
6,267

 
$
(199
)
 
$
2,298

 
$
7

 
$
8,375

Issuance of common stock
 
19,838

 

 
2,534

 

 

 

 
2,534

Dividends declared ($0.04 per share)
 

 

 

 

 
(7
)
 

 
(7
)
Purchases of treasury stock
 
(189
)
 

 

 
(23
)
 

 

 
(23
)
Tax provision related to stock-based compensation
 

 

 
(2
)
 

 

 

 
(2
)
Compensation costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested compensation awards, net
 
573

 

 

 

 

 

 

Compensation costs included in net loss
 

 

 
44

 

 

 

 
44

Net loss
 

 

 

 

 
(535
)
 

 
(535
)
Balance as of June 30, 2016
 
169,602

 
$
2

 
$
8,843

 
$
(222
)
 
$
1,756

 
$
7

 
$
10,386








The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
 
Six Months Ended
June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(535
)
 
$
(296
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depletion, depreciation and amortization
 
737

 
639

Impairment of oil and gas properties
 
32

 
138

Impairment of inventory and other property and equipment
 
5

 
9

Exploration expenses, including dry holes
 
40

 
15

Deferred income taxes
 
(284
)
 
(161
)
Gain on disposition of assets, net
 
(3
)
 
(3
)
Accretion of discount on asset retirement obligations
 
9

 
6

Discontinued operations
 

 
(3
)
Interest expense
 
9

 
9

Derivative related activity
 
535

 
312

Amortization of stock-based compensation
 
44

 
47

Other
 
36

 
(6
)
Change in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(51
)
 
49

Income taxes receivable
 
39

 
1

Inventories
 
(12
)
 
(44
)
Prepaid expenses
 
(1
)
 
(1
)
Derivatives
 
(12
)
 

Other current assets
 
1

 
(8
)
Accounts payable
 
(60
)
 
(275
)
Interest payable
 
20

 
22

Income taxes payable
 
(2
)
 
(1
)
Other current liabilities
 
(26
)
 
(17
)
Net cash provided by operating activities
 
521

 
432

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of assets, net of cash sold
 
2

 
7

Proceeds from investment securities
 
1

 

Purchase of investment securities
 
(1,495
)
 

Additions to oil and gas properties
 
(971
)
 
(1,083
)
Additions to other assets and other property and equipment, net
 
(126
)
 
(130
)
Net cash used in investing activities
 
(2,589
)
 
(1,206
)
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock, net of issuance costs
 
2,534

 

Distributions to noncontrolling interests
 

 
(1
)
Purchases of treasury stock
 
(23
)
 
(31
)
Tax (provision) benefits related to stock-based compensation
 
(2
)
 
6

Dividends paid
 
(7
)
 
(6
)
Net cash provided by (used in) financing activities
 
2,502

 
(32
)
Net increase (decrease) in cash and cash equivalents
 
434

 
(806
)
Cash and cash equivalents, beginning of period
 
1,391

 
1,025

Cash and cash equivalents, end of period
 
$
1,825

 
$
219

  


The financial information included herein has been prepared by management
without audit by independent registered public accountants.
  
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)


NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company ("Pioneer" or the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company operating in the United States, with operations primarily in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Raton field in southeast Colorado and the West Panhandle field in the Texas Panhandle.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the consolidated financial statements of the Company as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015 include all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
Certain reclassifications have been made to the 2015 financial statement and footnote amounts in order to conform to the 2016 presentation.
Restructuring. In February 2016, the Company announced plans to restructure its pressure pumping operations in South Texas, including relocating its two Eagle Ford Shale pressure pumping fleets to the Spraberry/Wolfcamp area. In connection therewith, the Company offered severance to certain employees and relocated a number of other employees from its South Texas locations to its operations in the Permian Basin. This initiative was substantially complete as of June 30, 2016.
In connection therewith, during the three and six months ended June 30, 2016, the Company recognized $1 million and $4 million, respectively, of restructuring charges in other expense in the accompanying consolidated statements of operations. The restructuring charges for the six months ended June 30, 2016 included approximately $3 million in cash employee severance costs and $1 million in employee relocation and other costs.
In May 2015, the Company announced plans to restructure its operations in Colorado, including closing its office in Denver, Colorado and eliminating its Trinidad-based pressure pumping operations. The restructuring plan was substantially complete as of December 31, 2015. In connection therewith, during the three and six months ended June 30, 2015, the Company recognized $15 million of restructuring charges in other expense in the accompanying consolidated statements of operations.
As of June 30, 2016, the Company had $3 million of restructuring liabilities recorded in other current and noncurrent liabilities in the accompanying consolidated balance sheet, primarily related to future lease obligations associated with its Denver, Colorado office.
Issuance of common stock. In the second quarter of 2016, the Company issued 6.0 million shares of common stock and received cash proceeds of $937 million, net of associated underwriting and offering expenses. In the first quarter of 2016, the Company issued 13.8 million shares of common stock and received cash proceeds of $1.6 billion, net of associated underwriting and offering expenses.
New accounting pronouncements. In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses." ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is evaluating the new guidance and does not believe this standard will have a material impact on its consolidated financial statements.

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Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as certain classification changes in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In February 2016, FASB issued ASU 2016-02, "Leases." ASU 2016-02 requires the recognition of lease assets and lease liabilities by lessees for those leases currently classified as operating leases and makes certain changes to the way lease expenses are accounted for. This update is effective for fiscal years beginning after December 15, 2018 and for interim periods beginning the following year. This update should be applied using a modified retrospective approach, and early adoption is permitted. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 changes certain guidance related to the recognition, measurement, presentation and disclosure of financial instruments. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted for the majority of the update, but is permitted for two of its provisions. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. The Company is evaluating the new guidance and has not determined the impact this standard may have on its consolidated financial statements or decided upon its method of adoption.
NOTE C. Divestitures
EFS Midstream. In July 2015, the Company closed on the sale of its 50.1 percent equity interest in EFS Midstream LLC ("EFS Midstream") to an unaffiliated third party, with the Company receiving total consideration of $1.0 billion, of which $530 million was received in cash at closing and the remaining $501 million was in the form of a note, which was payable to the Company one year from closing. The note receivable was paid in full in July 2016. See Note O for additional information on the payment of the note receivable.
NOTE D. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
Level 1 – quoted prices for identical assets or liabilities in active markets.
Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – unobservable inputs for the asset or liability.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
The following table presents the Company's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2016 for each of the fair value hierarchy levels: 
 
 
Fair Value Measurement at June 30, 2016 Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at June 30, 2016
 
 
(in millions)
Assets:
 
 
 
 
 
 
 
 
Commodity derivatives
 
$

 
$
285

 
$

 
$
285

Deferred compensation plan assets
 
78

 

 

 
78

Total assets
 
78

 
285

 

 
363

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
42

 

 
42

Interest rate derivatives
 

 
9

 

 
9

Total liabilities
 

 
51

 

 
51

Total recurring fair value measurements
 
$
78

 
$
234

 
$

 
$
312

Commodity derivatives. The Company's commodity derivatives represent oil, natural gas liquids ("NGL") and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.
The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar contracts and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Deferred compensation plan assets. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of June 30, 2016, the significant inputs to these asset values represented Level 1 independent active exchange market price inputs.
Interest rate derivatives. The Company's interest rate derivative liabilities represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The derivative values attributable to the Company's interest rate derivative contracts are based on (i) the contracted notional amounts, (ii) forward active market-quoted London Interbank Offered Rate ("LIBOR") and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative fair value measurements represent Level 2 inputs in the hierarchy.
Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets and liabilities can include inventory, proved and unproved oil and gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. The Company recognized noncash impairment charges of $5 million and $9 million for the the six months ended June 30, 2016 and 2015, respectively, attributable to inventory and other property and equipment.
Proved oil and gas properties. As a result of the Company's proved property impairment assessments, the Company recognized pretax, noncash impairment charges to reduce the carrying values of (i) the West Panhandle field during the three

12

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

months ended March 31, 2016 and (ii) the Eagle Ford Shale field, the West Panhandle field and the South Texas - Other field during the year ended December 31, 2015 to their estimated fair values.
The Company calculated the fair values of the West Panhandle field, the Eagle Ford Shale field and the South Texas - Other field using a discounted future cash flow model. Significant Level 3 assumptions associated with the calculations included management's longer-term commodity price outlooks ("Management's Price Outlooks") and management's outlooks for (i) production costs, (ii) capital expenditures, (iii) production and (iv) estimated proved reserves and risk-adjusted probable reserves. Management's Price Outlooks are developed based on third-party longer-term commodity futures price outlooks as of each measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine estimated fair value.
The following table presents the fair value and fair value adjustments (in millions) for the Company's 2016 and 2015 proved property impairments, as well as the average oil price per barrel ("Bbl") and gas price per British thermal unit ("MMBtu") utilized in respective Management's Price Outlooks:
 
 
 
 
 
 
 
 
Management's Price Outlooks
 
 
Impairment Date
 
Fair Value
 
Fair Value Adjustment
 
Oil
 
Gas
West Panhandle
 
March 2016
 
$
33

 
$
(32
)
 
$
49.77

 
$
3.24

South Texas - Eagle Ford Shale
 
December 2015
 
$
483

 
$
(846
)
 
$
52.82

 
$
3.34

South Texas - Other
 
September 2015
 
$
88

 
$
(72
)
 
$
57.41

 
$
3.46

West Panhandle
 
March 2015
 
$
61

 
$
(138
)
 
$
65.02

 
$
3.83

It is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the future resulting in the need to impair their carrying values. The primary factors that may affect estimates of future cash flows are (i) future adjustments, both positive and negative, to proved and risk-adjusted probable and possible oil and gas reserves, (ii) results of future drilling activities, (iii) Management's Price Outlooks and (iv) increases or decreases in production and capital costs associated with these reserves.
Unproved oil and gas properties. During March 2016, the Company recorded an impairment charge of $32 million to write-off the carrying value of its unproved royalty acreage in Alaska (reported in exploration and abandonments in the accompanying consolidated statements of operations) as a result of the operator curtailing operations in the area and Management's Price Outlooks.
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the accompanying consolidated balance sheets as of June 30, 2016 and December 31, 2015 are as follows: 

 
 
June 30, 2016
 
December 31, 2015
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(in millions)
Commercial paper, corporate bonds and time deposits
 
$
1,521

 
$
1,521

 
$
275

 
$
275

Current portion of long-term debt
 
$
939

 
$
959

 
$
448

 
$
462

Long-term debt
 
$
2,725

 
$
2,999

 
$
3,207

 
$
3,206

Commercial paper, corporate bonds and time deposits. Periodically, the Company invests in commercial paper and corporate bonds with investment grade rated entities. The Company also periodically enters into time deposits with financial institutions. The investments are carried at amortized cost, which approximates fair value, and classified as held-to-maturity as the Company has the intent and ability to hold them until they mature. The net carrying value of held-to-maturity investments is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the investments. Income related to these investments is recorded in interest and other income in the Company's consolidated statement of operations. The investments represent Level 2 inputs in the hierarchy. Commercial paper, corporate bonds and time deposits are included in cash and cash equivalents, short-

13

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

term investments or long-term investments in the accompanying consolidated balance sheets based on their maturity dates. The following table provides the components of the Company's cash and cash equivalents and investments as of June 30, 2016:
 
 
June 30, 2016
Consolidated Balance Sheet Location
 
Cash
 
Commercial Paper
 
Corporate Bonds
 
Time
Deposits
 
Total
 
 
(in millions)
Cash and cash equivalents
 
$
1,800

 
$
25

 
$

 
$

 
$
1,825

Short-term investments
 

 
867

 
225

 
381

 
1,473

Long-term investments
 

 

 
23

 

 
23

 
 
$
1,800

 
$
892

 
$
248

 
$
381

 
$
3,321

Debt obligations. Current and noncurrent long-term debt includes the Company's credit facility and the Company's senior notes. The fair value of the Company's debt obligations is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy. The fair value of the Company's credit facility is calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rates and (iii) the applicable credit-adjustments. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.
The Company has other financial instruments consisting primarily of accounts receivables, prepaid expenses, notes receivable, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
NOTE E. Derivative Financial Instruments
The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
Periodically, the Company may pay a premium to enter into commodity contracts. Premiums paid, if any, have been nominal in relation to the value of the underlying asset in the contract. The Company recognizes the nominal premium payments as an increase to the value of derivative assets when paid. All derivatives are adjusted to fair value as of each balance sheet date.
Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company uses derivative contracts to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and the actual index prices at which the oil is sold.

14

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding oil derivative contracts as of June 30, 2016 and the weighted average oil prices for those contracts: 
 
2016
 
 
Year Ending December 31,
 
Third Quarter
 
Fourth Quarter
 
 
2017
Collar contracts:
 
 
 
 
 
 
Volume (Bbl)

 

 
 
6,000

Price per Bbl:
 
 
 
 
 
 
Ceiling
$

 
$

 
 
$
70.40

Floor
$

 
$

 
 
$
50.00

Collar contracts with short puts:
 
 
 
 
 
 
Volume (Bbl) (a)
112,000

 
112,000

 
 
75,000

Price per Bbl:
 
 
 
 
 
 
Ceiling
$
75.94

 
$
75.94

 
 
$
61.72

Floor
$
65.41

 
$
65.41

 
 
$
49.62

Short put
$
47.03

 
$
47.03

 
 
$
41.41

____________________
(a)
During June 2016, the Company paid $12 million to convert 15,000 Bbls per day of 2017 collar contracts with short puts into new 2017 collar contracts with short puts with a ceiling price of $60.00 per Bbl, a floor price of $45.00 per Bbl and a short put price of $40.00 per Bbl. During the period from July 1, 2016 through July 26, 2016, the Company paid $7 million to convert 8,000 Bbls per day of additional 2017 collar contracts with short puts into new 2017 collar contracts with short puts with a weighted average ceiling price of $60.75 per Bbl, a floor price of $45.00 per Bbl and a short put price of $40.00 per Bbl.
NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway NGL component product prices. The Company uses derivative contracts to manage the NGL component price volatility.

15

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding NGL derivative contracts as of June 30, 2016 and the weighted average NGL prices for those contracts: 
 
2016
 
Year Ending December 31,
 
Third Quarter
 
Fourth Quarter
 
2017
Propane swap contracts (a):
 
 
 
 
 
Volume (Bbl) (b)
7,500

 
7,500

 

Price per Bbl
$
21.57

 
$
21.57

 
$

Ethane collar contracts (c):
 
 
 
 
 
Volume (Bbl)

 

 
3,000

Price per Bbl:
 
 
 
 
 
Ceiling
$

 
$

 
$
11.83

Floor
$

 
$

 
$
8.68

Ethane basis swap contracts (d):
 
 
 
 
 
Volume (MMBtu)
2,768

 
2,768

 

Price differential ($/MMBtu)
$
0.91

 
$
0.91

 
$

 ____________________
(a)
Represent derivative contracts that reduce the price volatility of propane forecasted for sale by the Company at Mont Belvieu, Texas and Conway, Kansas-posted prices.
(b)
During the period from July 1, 2016 through July 26, 2016, the Company terminated propane swap contracts for 1,500 Bbls per day of September through December 2016 production for proceeds of $167 thousand.
(c)
Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(d)
Represent basis swap contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices. The basis swaps fix the basis differential on a NYMEX Henry Hub ("HH") MMBtu equivalent basis. The Company will receive the HH price plus the price differential on 2,768 MMBtu per day, which is equivalent to 1,000 Bbls per day of ethane.
Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to HH gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and the actual index prices at which the gas is sold.

16

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

The following table sets forth the volumes per day associated with the Company's outstanding gas derivative contracts as of June 30, 2016 and the weighted average gas prices for those contracts: 
 
2016
 
Year Ending December 31,
 
Third Quarter
 
Fourth Quarter
 
2017
 
2018
Swap contracts:
 
 
 
 
 
 
 
Volume (MMBtu)
70,000

 
70,000

 

 

Price per MMBtu
$
4.06

 
$
4.06

 
$

 
$

Collar contracts with short puts:
 
 
 
 
 
 
 
Volume (MMBtu) (a)
180,000

 
180,000

 
80,000

 
50,000

Price per MMBtu:
 
 
 
 
 
 
 
Ceiling
$
4.01

 
$
4.01

 
$
3.15

 
$
3.40

Floor
$
3.24

 
$
3.24

 
$
2.75

 
$
2.75

Short put
$
2.78

 
$
2.78

 
$
2.35

 
$
2.25

Basis swap contracts:
 
 
 
 
 
 
 
Gulf Coast index swap volume (b)
10,000

 
10,000

 

 

Price differential ($/MMBtu)
$

 
$

 
$

 
$

Mid-Continent index swap volume (b)
15,000

 
15,000

 
45,000

 

Price differential ($/MMBtu)
$
(0.32
)
 
$
(0.32
)
 
$
(0.32
)
 
$

Permian Basin index swap volume (c)

 
34,946

 
9,863

 

Price differential ($/MMBtu)
$

 
$
0.41

 
$
0.37

 
$

____________________
(a)
During the period from July 1, 2016 through July 26, 2016, the Company entered into additional gas collar contracts with short puts for 50,000 MMBtu per day of 2017 production with a ceiling price of $3.76 per MMBtu, a floor price of $3.00 per MMBtu and a short put price of $2.50 per MMBtu.
(b)
Represent swaps that fix the basis differentials between the index prices at which the Company sells its Gulf Coast and Mid-Continent gas, respectively, and the HH index price used in gas swap and collar contracts with short puts.
(c)
Represent swaps that fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in southern California.
Marketing and basis derivative activities. Periodically, the Company enters into buy and sell marketing arrangements to fulfill firm pipeline transportation commitments. Associated with these marketing arrangements, the Company may enter into index swaps to mitigate price risk. As of June 30, 2016, the Company did not have any marketing derivatives outstanding.
Interest rate derivative activities. As of June 30, 2016, the Company was a party to interest rate derivative contracts whereby the Company will receive the three-month LIBOR rate for the 10-year period from December 2017 to December 2027 in exchange for paying a weighted average fixed interest rate of 1.94 percent on a notional amount of $250 million on December 15, 2017.
Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

17

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:
 
Fair Value of Derivative Instruments as of June 30, 2016
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
294

 
$
(21
)
 
$
273

Commodity price derivatives
 
Derivatives - noncurrent
 
$
18

 
$
(6
)
 
12

 
 
 
 
 
 
 
 
$
285

Liability Derivatives:
 

 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
29

 
$
(21
)
 
$
8

Commodity price derivatives
 
Derivatives - noncurrent
 
$
40

 
$
(6
)
 
34

Interest rate derivatives
 
Derivatives - noncurrent
 
$
9

 
$

 
9

 
 
 
 
 
 
 
 
$
51


Fair Value of Derivative Instruments as of December 31, 2015
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in millions)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
695

 
$
(1
)
 
$
694

Commodity price derivatives
 
Derivatives - noncurrent
 
$
64

 
$

 
64

 
 
 
 
 
 
 
 
$
758

Liability Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
1

 
$
(1
)
 
$

Commodity price derivatives
 
Derivatives - noncurrent
 
$
1

 
$

 
1

 
 
 
 
 
 
 
 
$
1


The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.


18

Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

The following table details the location of gains and losses recognized on the Company's derivative contracts in the accompanying consolidated statements of operations:
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as
 
Location of Gain / (Loss) Recognized in
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 Hedging Instruments
 
Earnings on Derivatives
 
2016
 
2015
 
2016
 
2015
 
 
 
 
(in millions)
 
 
 
 
Commodity price derivatives
 
Derivative gains (losses), net
 
$
(222
)
 
$
(212
)
 
$
(177
)
 
$
39

Interest rate derivatives
 
Derivative gains (losses), net
 
(7
)
 
15

 
(9
)
 
5

Total
 
$
(229
)
 
$
(197
)
 
$
(186
)
 
$
44

NOTE F. Exploratory Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Company's capitalized exploratory well and project activity during the three and six months ended June 30, 2016:
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
 
(in millions)
 
(in millions)
Beginning capitalized exploratory costs
$
361

 
$
306

Additions to exploratory costs pending the determination of proved reserves
314

 
664

Reclassification due to determination of proved reserves
(318
)
 
(612
)
Exploratory well costs charged to exploration expense

 
(1
)
Ending capitalized exploratory costs
$
357

 
$
357

The following table provides an aging, as of June 30, 2016 and December 31, 2015 of capitalized exploratory costs and the number of projects for which exploratory well costs have been capitalized for a period greater than one year, based on the date drilling was completed:
 
June 30, 2016
 
December 31, 2015
 
(in millions, except well counts)
Capitalized exploratory well costs that have been suspended:
 
 
 
One year or less
$
355

 
$
303

More than one year
2

 
3

 
$
357

 
$
306

Number of wells or projects with exploratory well costs that have been suspended for a period greater than one year
1

 
1

The well that was suspended for a period greater than one year as of June 30, 2016 is in the Eagle Ford Shale area. The Company expects to complete this well in 2017.
NOTE G. Long-term Debt
Credit facility. The Company's long-term debt consists of senior notes, a revolving corporate credit facility (the "Credit Facility") and the effects of issuance costs, issuance discounts and net deferred fair value hedge losses. The Credit Facility is maintained with a syndicate of financial institutions and has aggregate loan commitments of $1.5 billion that expire in August 2020. As of June 30, 2016, the Company had no outstanding borrowings under the Credit Facility and was in compliance with its debt covenants.
Senior notes. The Company's 5.875% senior notes (the "5.875% Senior Notes"), with an outstanding debt principal balance of $455 million, matured and were repaid in July 2016. The Company's 6.65% senior notes (the "6.65% Senior Notes"), with an outstanding debt principal balance of $485 million, will mature in March 2017. The 5.875% Senior Notes and 6.65% Senior Notes are classified as current in the accompanying consolidated balance sheets as of June 30, 2016. See Note O for additional information on the payment of the 5.875% Senior Notes.
NOTE H. Incentive Plans
Stock-based compensation
For the three and six months ended June 30, 2016, the Company recorded $29 million and $53 million, respectively, of stock-based compensation expense for all plans, as compared to $32 million and $61 million for the same respective periods in 2015. As of June 30, 2016, there was $154 million of unrecognized compensation expense related to unvested share-based compensation plan awards, including $35 million attributable to stock-based awards that are expected to be settled on their vesting date in cash, rather than in equity shares ("Liability Awards"). The unrecognized compensation expense will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis. As of June 30, 2016 and December 31, 2015, accounts payable – due to affiliates included $9 million and $16 million, respectively, of liabilities attributable to Liability Awards.
The following table summarizes the activity that occurred during the six months ended June 30, 2016 for each type of share-based incentive award issued by Pioneer: 
 
 
Restricted
Stock Equity
Awards
 
Restricted
Stock Liability
Awards
 
Performance
Units
 
Stock
Options
Outstanding as of December 31, 2015
 
1,081,650

 
271,031

 
148,547

 
199,058

Awards granted
 
491,104

 
175,988

 
104,114

 

Awards vested
 
(438,092
)
 
(134,658
)
 
(8,670
)
 

Awards forfeited
 
(24,922
)
 
(10,310
)
 
(4,821
)
 

Outstanding as of June 30, 2016
 
1,109,740

 
302,051

 
239,170

 
199,058

NOTE I. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and related facilities. The following table summarizes the Company's asset retirement obligation activity during the three and six months ended June 30, 2016 and 2015: 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
 
 
 
 
Beginning asset retirement obligations
 
$
285

 
$
188

 
$
285

 
$
189

New wells placed on production
 

 

 

 
1

Liabilities settled
 
(9
)
 
(4
)
 
(13
)
 
(9
)
Accretion of discount
 
5

 
3

 
9

 
6

Ending asset retirement obligations
 
$
281

 
$
187

 
$
281

 
$
187

The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of June 30, 2016, the current portion of the Company's asset retirement obligations was $42 million, as compared to $40 million at December 31, 2015.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)



NOTE J. Commitments and Contingencies
The Company is a party to proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Obligations following divestitures. In connection with its divestiture transactions, the Company may retain certain liabilities and provide the purchaser certain indemnifications, subject to defined limitations, which may apply to identified pre-closing matters, including matters of litigation, environmental contingencies, royalty obligations and income taxes. The Company does not believe these obligations are probable of having a material impact on its liquidity, financial position or future results of operations.
NOTE K. Interest and Other Income
The following table provides the components of the Company's interest and other income for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
 
 
 
 
Interest income
 
$
5

 
$

 
$
9

 
$

Deferred compensation plan income
 

 

 
2

 
3

Equity interest in income of EFS Midstream (a)
 

 
3

 

 
5

Other income
 
1

 
4

 
2

 
6

Total interest and other income
 
$
6

 
$
7

 
$
13

 
$
14

 ____________________
(a)
The Company accounted for its investment in EFS Midstream prior to its sale in July 2015 using the equity method. EFS Midstream provided gathering, treating and transportation services for the Company. See Note C for additional information on the Company's sale of EFS Midstream.

20

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)



 NOTE L. Other Expense
The following table provides the components of the Company's other expense for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
 
 
 
 
Transportation commitment charges (a)
 
$
25

 
$
13

 
$
50

 
$
27

Idle drilling and well service equipment charges (b)
 
10

 
28

 
31

 
51

(Income) loss from vertical integration services (c)
 
16

 
(5
)
 
29

 
(4
)
Terminated drilling rig charges (d)
 
1

 

 
16

 

Impairment of inventory and other property and equipment (e)
 
1

 
3

 
5

 
9

Restructuring charges (f)
 
1

 
15

 
4

 
15

Other
 
13

 
4

 
19

 
9

Total other expense
 
$
67

 
$
58

 
$
154

 
$
107

 ____________________
(a)
Primarily represents firm transportation payments on excess pipeline capacity commitments.
(b)
Primarily represents expenses attributable to idle drilling rig fees, which are not chargeable to joint operations.
(c)
Loss from vertical integration services primarily represents net margins (attributable to third party working interest owners) that result from Company-provided fracture stimulation and service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three and six months ended June 30, 2016, these vertical integration net margins included $56 million and $124 million, respectively, of revenues and $72 million and $153 million, respectively, of costs and expenses. For the same respective periods in 2015, these vertical integration net margins included $86 million and $198 million of revenues and $81 million and $194 million of costs and expenses.
(d)
Primarily represents charges to terminate rig contracts that were not required to meet planned drilling activities.
(e)
Primarily represents charges to reduce excess material and supplies inventories to their market values. See Note D for additional information on the fair value of materials and supplies inventory.
(f)
Represents costs associated with the Company's restructuring of its pressure pumping operations in South Texas in 2016 and its operations in Colorado in 2015. See Note B for additional information on the restructuring charges.
NOTE M. Income Taxes
The Company's income tax benefit attributable to income from continuing operations consisted of the following for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
 
 
 
 
Current tax provision
 
$

 
$
(1
)
 
$

 
$
(1
)
Deferred tax benefit
 
143

 
124

 
284

 
161

Income tax benefit
 
$
143

 
$
123

 
$
284

 
$
160

For both the three and six months ended June 30, 2016, the Company's effective tax rates, excluding income attributable to noncontrolling interests, were 35 percent, as compared to effective rates of 36 percent and 35 percent for the same respective periods in 2015. The Company has no unrecognized tax benefits as of June 30, 2016.
The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. The Internal Revenue Service has closed examinations of the 2013 and prior tax years and, with few exceptions, the Company believes that it is no longer subject to examinations by state and foreign tax authorities for years before 2010. As of June 30, 2016, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company's liquidity, future results of operations or financial position.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)

NOTE N. Net Loss Per Share
The following table reconciles the Company's loss from continuing operations to basic and diluted net loss attributable to common stockholders for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in millions)
 
 
 
 
Basic and diluted loss from continuing operations
 
$
(268
)
 
$
(217
)
 
(535
)
 
(292
)
Basic and diluted loss from discontinued operations
 
$

 
$
(1
)
 
$

 
$
(4
)
Basic and diluted net loss attributable to common stockholders
 
$
(268
)
 
$
(218
)
 
$
(535
)
 
$
(296
)
Basic and diluted weighted average common shares outstanding were 164 million and 163 million, respectively, for the three and six months ended June 30, 2016 and 149 million for the three and six months ended June 30, 2015.
NOTE O. Subsequent Events
Senior notes. In July 2016, the Company's 5.875% Senior Notes matured. The Company funded the payment of the $455 million principal balance with cash on hand. See Note G for additional information regarding the Company's senior notes.
EFS Midstream. In July 2016, the Company received a cash payment of $501 million from an unaffiliated third party to settle the outstanding note receivable that was reflected in the accompanying consolidated balance sheet as of June 30, 2016. The note receivable represented a portion of the consideration received from the July 2015 sale of EFS Midstream. See Note C for additional information regarding the Company's sale of EFS Midstream.



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PIONEER NATURAL RESOURCES COMPANY

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the second quarter of 2016 included the following highlights:
Net loss attributable to common stockholders for the second quarter of 2016 was $268 million ($1.63 per diluted share), as compared to net loss of $218 million ($1.46 per diluted share) for the second quarter of 2015. The primary components of the increase in the net loss attributable to common stockholders include:
a $55 million increase in DD&A expense, primarily attributable to the 18 percent increase in sales volumes and reductions in proved reserves as a result of the decline in commodity prices, partially offset by impairments of proved properties during 2015 and 2016, which reduced the carrying value of the Company's oil and gas properties;
a $32 million increase in net derivative losses, primarily as a result of changes in forward commodity prices and the Company's portfolio of derivatives;
a $14 million decrease in net margins attributable to purchases and sales of oil and gas used to fulfill transportation commitments;
a $10 million increase in interest expense, primarily related to the issuance of $500 million of 3.45% Senior Notes due 2021 and $500 million of 4.45% Senior Notes due 2026 in December 2015; and
a $9 million increase in other expense, primarily related to increases in unused firm transportation costs and the net loss from Company-provided fracture stimulation and related service operations that are provided to third party working interest owners, offset by decreases in idle drilling and well service equipment and restructuring charges; partially offset by
a $23 million decrease in total oil and gas production costs and production and ad valorem taxes, primarily due to the Company's cost saving initiatives and a 13 percent decrease in the average commodity prices per BOE;
a $20 million increase in the Company's income tax benefit as a result of the Company's larger loss from continuing operations before taxes;
a $17 million increase in oil and gas revenues as a result of the aforementioned 18 percent increase in sales volumes, partially offset by the aforementioned decrease in commodity prices; and
a $10 million decrease in exploration and abandonments expense, primarily due to the 2015 write-off of wells in southeast Colorado.
During the second quarter of 2016, average daily sales volumes from continuing operations increased by 18 percent to 232,703 BOEPD, as compared to 196,626 BOEPD during the second quarter of 2015. The increase in second quarter 2016 average daily sales volumes, as compared to the second quarter of 2015, is primarily due to the Company's successful Spraberry/Wolfcamp horizontal drilling program.
Average oil and gas prices decreased during the second quarter of 2016 to $41.43 per Bbl and $1.67 per Mcf, respectively, as compared to $51.64 per Bbl and $2.37 per Mcf, respectively, in the second quarter of 2015. Average NGL prices increased during the second quarter of 2016 to $14.21 per Bbl, as compared to $14.03 per Bbl in the second quarter of 2015.
Net cash provided by operating activities increased to $409 million for the three months ended June 30, 2016, as compared to $327 million for the three months ended June 30, 2015. The $82 million increase in net cash provided by operating activities is primarily due to reductions in operating costs and funds used to satisfy working capital obligations and increases in the Company's oil and gas revenues for the three months ended June 30, 2016 as a result of increased sales volumes.
Issuance of 6.0 million shares of common stock during the second quarter of 2016 for net cash proceeds of $937 million.
As of June 30, 2016, the Company's net debt to book capitalization decreased to three percent, as compared to 21 percent at December 31, 2015, primarily due to the Company's issuances of common stock during 2016.
Recent Developments
Acquisition and drilling rig additions. In June 2016, the Company announced that it had entered into an agreement to acquire 28,000 net acres in the Permian Basin for $435 million (before normal closing adjustments), the majority of which is in the Company's core operating area. The acquisition is expected to close during the third quarter of 2016. In conjunction with the

23

PIONEER NATURAL RESOURCES COMPANY

acquisition and the Company's improved outlook for oil prices for the fourth quarter of 2016 and 2017, the Company announced that it expects to increase its horizontal drilling rig count to 17 rigs (from 12 rigs that were originally planned) in the Permian Basin by the end of 2016. The Company's capital expenditures budget for 2016 has been increased by $100 million to $2.1 billion to fund the incremental drilling rig expenditures during 2016. The updated 2016 capital budget includes $1.95 billion for drilling and completions operations (includes tank batteries, salt water disposal facilities and gas processing facilities) and $150 million for water infrastructure, vertical integration, systems upgrades and field facilities. The additional drilling activity in 2016 is pad drilling, with the wells on the new pads expected to be placed on production in early 2017.
EFS Midstream. In July 2016, the Company received a cash payment of $501 million from an unaffiliated third party to settle the outstanding note receivable that was reflected in the accompanying consolidated balance sheet as of June 30, 2016. The note receivable represented a portion of the consideration received from the July 2015 sale of EFS Midstream.

 Third Quarter 2016 Outlook
Based on current estimates, the Company expects the following operating and financial results from continuing operations for the quarter ending September 30, 2016:
Production is forecasted to average 232,000 to 237,000 BOEPD.
Production costs (including production and ad valorem taxes and transportation costs) are expected to average $8.25 to $10.25 per BOE based on current NYMEX strip commodity prices. DD&A expense is expected to average $17.50 to $19.50 per BOE.
Total exploration and abandonment expense is expected to be $20 million to $30 million. General and administrative expense is expected to be $78 million to $83 million. Interest expense is expected to be $45 million to $50 million, and other expense is expected to be $65 million to $75 million. Other expense is expected to include (i) $7 million to $12 million for stacked drilling rig charges, (ii) $28 million to $33 million of charges associated with excess firm gathering and transportation commitments, (iii) $15 million to $20 million of losses (principally noncash) associated with the portion of vertical integration services provided to nonaffiliated working interest owners, including joint venture partners, in wells operated by the Company and (iv) other miscellaneous charges. Accretion of discount on asset retirement obligations is expected to be $4 million to $7 million.
The Company's effective income tax rate is expected to range from 35 percent to 40 percent assuming current capital spending plans and no significant mark-to-market changes in the Company's derivative position. Current income taxes are expected to be $1 million to $5 million and are primarily attributable to state taxes.
Operations and Drilling Highlights
The following table summarizes the Company's average daily oil, NGL, gas and total production by asset area during the six months ended June 30, 2016:
 
 
Oil (Bbls)
 
NGLs (Bbls)
 
Gas (Mcf)
 
Total (BOE)
Permian Basin
 
109,702

 
26,315

 
131,938

 
158,007

South Texas - Eagle Ford Shale
 
14,358

 
10,781

 
83,174

 
39,002

Raton Basin
 

 

 
99,227

 
16,538

West Panhandle
 
3,344

 
2,970

 
13,190

 
8,513

South Texas - Other
 
1,355

 
160

 
22,027

 
5,186

Other
 
3

 
1

 
41

 
10

   Total
 
128,762

 
40,227

 
349,597

 
227,256

The Company's total liquids production from continuing operations increased to 74 percent of total production, on a BOE basis, for the six months ended June 30, 2016, as compared to 69 percent for the same period last year.

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PIONEER NATURAL RESOURCES COMPANY

 The following table summarizes by geographic area the Company's finding and development costs incurred during the six months ended June 30, 2016: 
 
 
Acquisition Costs
 
Exploration
 
Development
 
 
 
 
Proved
 
Unproved
 
Costs
 
Costs
 
Total
 
 
(in millions)
Permian Basin
 
$
2

 
$
9

 
$
662

 
$
256

 
$
929

South Texas - Eagle Ford Shale
 

 

 
33

 
24

 
57

West Panhandle
 

 

 
1

 
2

 
3

South Texas - Other
 

 

 

 
2

 
2

Other
 

 

 
3

 

 
3

   Total
 
2

 
$
9

 
$
699

 
$
284

 
$
994

The following table summarizes the Company's development and exploration/extension drilling activities for the six months ended June 30, 2016: 
 
 
Development Drilling
 
 
Beginning Wells
in Progress
 
Wells
Spud
 
Successful
Wells
 
Ending Wells
in Progress
Permian Basin
 
27

 
10

 
31

 
6

South Texas - Eagle Ford Shale
 
6

 

 
2

 
4

   Total
 
33

 
10

 
33

 
10

 
 
 
Exploration/Extension Drilling
 
 
Beginning Wells
in Progress
 
Wells
Spud
 
Successful
Wells
 
Ending Wells
in Progress
Permian Basin
 
77

 
108

 
97

 
88

South Texas - Eagle Ford Shale
 
23

 
1

 
9

 
15

Total
 
100

 
109

 
106

 
103

Permian Basin area. In the first half of 2016, the Company reduced its rig count in the Spraberry/Wolfcamp area from 18 rigs at year-end 2015 to 13 rigs at June 30, 2016. During the second half of 2016, the Company expects to increase the rig count in the Spraberry/Wolfcamp area to 17 rigs. During 2016, the Company expects to complete approximately 230 horizontal wells (190 horizontal wells in the northern portion of the play and 40 horizontal wells in the southern portion of the play). Approximately 60 percent of the horizontal wells are planned to be drilled in the Wolfcamp B interval, 25 percent in the Wolfcamp A interval and 15 percent in the Lower Spraberry Shale interval. The Company continues to drill utilizing two-well and three-well pads and expects to spend $1.87 billion of drilling and completion capital in the Spraberry/Wolfcamp field during 2016. During the first six months of 2016, the Company placed on production 91 horizontal wells in the northern portion of the play and 33 horizontal wells in the southern portion of the play. In the northern portion of the play, approximately 65 percent of the wells placed on production were Wolfcamp B interval wells, and the remaining 35 percent were split predominantly between Wolfcamp A interval wells and Lower Spraberry Shale wells. In the southern portion of the play, all of the wells placed on production were Wolfcamp B interval wells.
The Company continues to utilize its integrated services to control well costs and operating costs in addition to supporting the execution of its drilling and production activities in the Spraberry field. During the second quarter of 2016, the Company utilized five Company-owned fracture stimulation fleets totaling approximately 330,000 horsepower to support its drilling operations in the Spraberry/Wolfcamp field. The Company idled three of its eight fracture stimulation fleets during the second quarter of 2016 due to reduced demand for fracture stimulation services as a result of the Company's reduced rig count. The Company also owns other field service equipment that supports its drilling and production operations, including pulling units, fracture stimulation tanks, water transport trucks, hot oilers, blowout preventers, construction equipment and fishing tools. In addition, Premier Silica (the Company's wholly-owned sand mining subsidiary) is supplying high-quality and logistically advantaged brown sand for proppant, which is being used by the Company to fracture stimulate horizontal wells in the Spraberry and Wolfcamp Shale intervals.

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PIONEER NATURAL RESOURCES C