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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________
FORM 10-Q 
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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 and zip code)
(972) 444-9001
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
PXD
 
New York Stock Exchange
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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    
Yes       No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes       No  
Number of shares of Common Stock outstanding as of August 5, 2019
167,143,628


Table of Contents

PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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 divestitures, 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, refining and export 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 and derivative contracts and 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, cybersecurity risks, ability to implement planned stock repurchases, the risks associated with the ownership and operation of the Company's 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, 2018 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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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.
"Bcf" means one billion cubic feet and is a measure of gas volume.
"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.
"Brent" means Brent oil price, a major trading classification of light sweet oil that serves as a benchmark price for purchases of oil worldwide.
"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.
"DD&A" means depletion, depreciation and amortization.
"GAAP" means accounting principles generally accepted in the United States of America.
"HH" means Henry Hub, a distribution hub in Louisiana that serves as the delivery location for gas futures contracts on the NYMEX.
"MBbl" means one thousand Bbls.
"MBOE" means one thousand BOEs.
"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, which are the heavier hydrocarbon liquids that are separated from the gas stream; such liquids include ethane, propane, isobutane, normal butane and natural gasoline.
"NYMEX" means the New York Mercantile Exchange.
"Pioneer" or the "Company" means Pioneer Natural Resources Company and its subsidiaries.
"Proved reserves" mean those quantities of oil and gas, which, by analysis of geosciences 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.
"SEC" means the United States Securities and Exchange Commission.
"U.S." means United States.
"WTI" means West Texas Intermediate, a light sweet blend of oil produced from fields in western Texas and is a grade of oil used as a benchmark in oil pricing.
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.
All currency amounts are expressed in U.S. dollars.

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PIONEER NATURAL RESOURCES COMPANY

PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
643

 
$
825

Restricted cash
75

 

Short-term investments

 
443

Accounts receivable:
 
 
 
Trade, net
783

 
694

Due from affiliates
6

 
120

Income taxes receivable
6

 
7

Inventories
249

 
242

Derivatives
49

 
52

Investment in affiliate
344

 
172

Other
20

 
25

Total current assets
2,175

 
2,580

Oil and gas properties, successful efforts method of accounting:
 
 
 
Proved properties
21,271

 
21,165

Unproved properties
606

 
601

Accumulated depletion, depreciation and amortization
(7,875
)
 
(8,218
)
Total oil and gas properties, net
14,002

 
13,548

Other property and equipment, net
1,035

 
1,291

Operating lease right-of-use assets
332

 

Long-term investments

 
125

Goodwill
262

 
264

Derivatives
10

 

Other assets
290

 
95

 
$
18,106

 
$
17,903









The financial information included as of June 30, 2019 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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PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in millions, except share data) 

 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable:
 
 
 
Trade
$
1,324

 
$
1,441

Due to affiliates
248

 
183

Interest payable
53

 
53

Income taxes payable

 
2

Current portion of long-term debt
449

 

Derivatives
15

 
27

Operating leases
141

 

Other
295

 
112

Total current liabilities
2,525

 
1,818

Long-term debt
1,837

 
2,284

Deferred income taxes
1,208

 
1,152

Operating leases
195

 

Other liabilities
465

 
538

Equity:
 
 
 
Common stock, $.01 par value; 500,000,000 shares authorized; 174,877,208 and 174,321,171 shares issued as of June 30, 2019 and December 31, 2018, respectively
2

 
2

Additional paid-in capital
9,124

 
9,062

Treasury stock at cost: 7,755,710 and 4,822,069 shares as of June 30, 2019 and December 31, 2018, respectively
(847
)
 
(423
)
Retained earnings
3,597

 
3,470

Total equity
11,876

 
12,111

Commitments and contingencies


 


 
$
18,106

 
$
17,903












The financial information included as of June 30, 2019 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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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,
 
2019
 
2018
 
2019
 
2018
Revenues and other income:
 
 
 
 
 
 
 
Oil and gas
$
1,196

 
$
1,286

 
$
2,332

 
$
2,552

Sales of purchased oil and gas
1,183

 
1,095

 
2,292

 
2,166

Interest and other income (loss), net
(11
)
 
9

 
181

 
26

Derivative gain (loss), net
43

 
(358
)
 
29

 
(566
)
Gain (loss) on disposition of assets, net
(488
)
 
79

 
(498
)
 
83

 
1,923

 
2,111

 
4,336

 
4,261

Costs and expenses:
 
 
 
 
 
 
 
Oil and gas production
219

 
243

 
440

 
456

Production and ad valorem taxes
69

 
70

 
136

 
146

Depletion, depreciation and amortization
412

 
378

 
833

 
735

Purchased oil and gas
1,102

 
1,026

 
2,059

 
2,080

Impairment of oil and gas properties

 
77

 

 
77

Exploration and abandonments
15

 
28

 
35

 
63

General and administrative
80

 
95

 
174

 
185

Accretion of discount on asset retirement obligations
2

 
4

 
5

 
8

Interest
29

 
32

 
59

 
68

Other
211

 
76

 
358

 
133

 
2,139

 
2,029

 
4,099

 
3,951

Income (loss) before income taxes
(216
)
 
82

 
237

 
310

Income tax benefit (provision)
47

 
(19
)
 
(56
)
 
(69
)
Net income (loss)
(169
)
 
63

 
181

 
241

Net loss attributable to noncontrolling interests

 
3

 

 
3

Net income (loss) attributable to common stockholders
$
(169
)
 
$
66

 
$
181

 
$
244

 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per share attributable to common stockholders
$
(1.01
)
 
$
0.38

 
$
1.07

 
$
1.42

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
168

 
170

 
168

 
170

Diluted
168

 
171

 
169

 
171

 
 
 
 
 
 
 
 
Dividends declared per share
$

 
$

 
$
0.32

 
$
0.16













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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PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS 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
 
Total Equity
 
(in thousands)
 
 
Balance as of December 31, 2018
169,499

 
$
2

 
$
9,062

 
$
(423
)
 
$
3,470

 
$
12,111

Dividends declared ($0.32 per share)

 

 

 

 
(54
)
 
(54
)
Exercise of long-term incentive stock options
10

 

 

 

 

 

Purchases of treasury stock
(1,594
)
 

 

 
(222
)
 

 
(222
)
Stock-based compensation costs:
 
 
 
 
 
 
 
 
 
 
 
Issued awards
507

 

 

 

 

 

Compensation costs included in net income

 

 
24

 

 

 
24

Net income

 

 

 

 
350

 
350

Balance as of March 31, 2019
168,422

 
2

 
9,086

 
(645
)
 
3,766

 
12,209

Purchases of treasury stock
(1,349
)
 

 

 
(202
)
 

 
(202
)
Stock-based compensation costs:
 
 
 
 
 
 
 
 
 
 
 
Issued awards
49

 

 

 

 

 

Compensation costs included in net loss

 

 
38

 

 

 
38

Net loss

 

 

 

 
(169
)
 
(169
)
Balance as of June 30, 2019
167,122

 
$
2

 
$
9,124

 
$
(847
)
 
$
3,597

 
$
11,876









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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PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF EQUITY (continued)
(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, 2017
170,189

 
$
2

 
$
8,974

 
$
(249
)
 
$
2,547

 
$
5

 
$
11,279

Dividends declared ($0.16 per share)

 

 

 

 
(27
)
 

 
(27
)
Purchases of treasury stock
(262
)
 

 

 
(45
)
 

 

 
(45
)
Stock-based compensation costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued awards
492

 

 

 

 

 

 

Compensation costs included in net income

 

 
17

 

 

 

 
17

Net income

 

 

 

 
178

 

 
178

Balance as of March 31, 2018
170,419

 
2

 
8,991

 
(294
)
 
2,698

 
5

 
11,402

Exercise of long-term incentive stock options
7

 

 

 
1

 

 

 
1

Purchases of treasury stock
(31
)
 

 

 
(6
)
 

 

 
(6
)
Stock-based compensation costs:
 
 
 
 
 
 
 
 
 
 
 
 

Issued awards
6

 

 

 

 

 

 

Compensation costs included in net income

 

 
24

 

 

 

 
24

Net income

 

 

 

 
66

 
(3
)
 
63

Balance as of June 30, 2018
170,401

 
$
2

 
$
9,015

 
$
(299
)
 
$
2,764

 
$
2

 
$
11,484









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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PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
 
Six Months Ended
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
181

 
$
241

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depletion, depreciation and amortization
833

 
735

Impairment of oil and gas properties

 
77

Impairment of inventory and other property and equipment
31

 
6

Exploration expenses, including dry holes
4

 
9

Deferred income taxes
56

 
69

(Gain) loss on disposition of assets, net
498

 
(83
)
Accretion of discount on asset retirement obligations
5

 
8

Interest expense
3

 
2

Derivative related activity
(20
)
 
355

Amortization of stock-based compensation
62

 
41

Investment in affiliate fair value adjustment
(171
)
 

Other
89

 
45

Change in operating assets and liabilities:
 
 
 
Accounts receivable
17

 
(214
)
Inventories
(58
)
 
(35
)
Investments

 
4

Other current assets
(16
)
 
(7
)
Accounts payable
(69
)
 
218

Interest payable

 
(5
)
Other current liabilities
(52
)
 
(12
)
Net cash provided by operating activities
1,393

 
1,454

Cash flows from investing activities:
 
 
 
Proceeds from disposition of assets, net of cash sold
57

 
111

Proceeds from investments
568

 
1,051

Purchases of investments

 
(482
)
Additions to oil and gas properties
(1,510
)
 
(1,588
)
Additions to other assets and other property and equipment
(135
)
 
(116
)
Net cash used in investing activities
(1,020
)
 
(1,024
)
Cash flows from financing activities:
 
 
 
Principal payments on long-term debt

 
(450
)
Purchases of treasury stock
(424
)
 
(51
)
Exercise of long-term incentive plan stock options

 
1

Payments of other liabilities
(2
)
 
(7
)
Dividends paid
(54
)
 
(27
)
Net cash used in financing activities
(480
)
 
(534
)
Net decrease in cash, cash equivalents and restricted cash
(107
)
 
(104
)
Cash, cash equivalents and restricted cash, beginning of period
825

 
896

Cash, cash equivalents and restricted cash, end of period
$
718

 
$
792





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, 2019
(Unaudited)


NOTE 1. 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 that explores for, develops and produces oil, natural gas liquids ("NGL") and gas in the Permian Basin in West Texas.
NOTE 2. Basis of Presentation
Presentation. In the opinion of management, the unaudited interim consolidated financial statements of the Company as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 include all adjustments and accruals, consisting only of normal, recurring adjustments and accruals necessary for a fair presentation of the results for the interim periods in conformity with generally accepted accounting principles in the United States ("GAAP"). The operating results for the three and six months ended June 30, 2019 are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These unaudited interim 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, 2018.
Certain reclassifications have been made to prior period amounts to conform to the current period's presentation.
Use of estimates in the preparation of financial statements. Preparation of the Company's unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Depletion of oil and gas properties and evaluations for impairment of goodwill and proved and unproved oil and gas properties, in part, is determined using estimates of proved, probable and possible oil and gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved, probable and possible reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price outlooks. Actual results could differ from the estimates and assumptions utilized.
Adoption of new accounting standards. In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" ("ASC 842"), which supersedes the lease recognition requirements in Accounting Standards Codification ("ASC") 840, "Leases" ("ASC 840"), and requires lessees to recognize lease assets and lease liabilities for those leases previously classified as operating leases. The Company adopted ASC 842 as of January 1, 2019 using the modified retrospective transition method. The Company elected to apply the transition guidance under ASU 2018-11, "Leases (Topic 842) Targeted Improvements," in which ASC 842 is applied at the adoption date, while the comparative periods continue to be reported in accordance with historic accounting under ASC 840. This standard does not apply to leases to explore for or use minerals, oil or gas resources, including the right to explore for those natural resources and rights to use the land in which those natural resources are contained.
ASC 842 allowed for the election of certain practical expedients at adoption to ease the burden of implementation. At implementation, the Company elected to (i) maintain the historical lease classification for leases prior to January 1, 2019, (ii) maintain the historical accounting treatment for land easements that existed at adoption, (iii) use historical practices in assessing the lease term of existing contracts at adoption, (iv) combine lease and non-lease components of a contract as a single lease and (v) not record short-term leases on the consolidated balance sheet, all in accordance with ASC 842.
The adoption of ASC 842 did not have a material impact on the consolidated statements of operations and had no impact on the Company's cash flows. The Company did not record a change to its opening retained earnings as of January 1, 2019, as there was no material change to the timing or pattern of recognition of lease costs due to the adoption of ASC 842.
As of December 31, 2018, the Company was the deemed owner of the Company's new corporate headquarters (for accounting purposes) during the construction period and was following the build-to-suit accounting guidance under ASC 840. On January 1, 2019, upon the adoption of ASC 842, the Company derecognized $217 million of other property and equipment and $219 million

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Table of Contents
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

of build-to-suit lease liability costs associated with the building as this contract no longer qualifies for capitalization. The contract will be evaluated and recorded on the consolidated balance sheets upon lease commencement, which is expected to occur during the second half of 2019.
See Note 10 for additional information.
New accounting pronouncements. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. Entities will use the modified retrospective approach to apply the standard's provisions and record a cumulative-effect adjustment to retained earnings for the any additional receivable loss allowances, if any, as of the beginning of the first reporting period in which the guidance is adopted. The Company continues to evaluate ASU 2016-13, but does not expect that it will have a material impact on its consolidated financial statements.
NOTE 3. Divestitures, Decommissioning and Restructuring Activities
Divestitures
In June 2019, the Company completed the sale of certain vertical wells and approximately 1,900 undeveloped acres in Martin County of the Permian Basin to an unaffiliated third party for net cash proceeds of $38 million, after normal closing adjustments. The Company recorded a gain of $31 million associated with the sale.
In May 2019, the Company announced its plans to divest of its ownership interest in certain gas gathering and processing assets operated by a third party. The Company is progressing the divestiture process, but no assurance can be given that this divestiture will be completed in accordance with the Company's plans or on terms and at a price that is acceptable to the Company as a result of the recent weakness in NGL and gas prices.
In May 2019, the Company completed the sale of its Eagle Ford assets and other remaining assets in South Texas (the "South Texas Divestiture") to an unaffiliated third party in exchange for total consideration having an estimated fair value of $213 million. The estimated fair value of the consideration reflects (i) net cash proceeds of $5 million, after normal closing adjustments, (ii) $136 million in contingent consideration, which was the estimated fair value of contingent consideration of up to $450 million as of the date of the sale and (iii) a $72 million receivable associated with estimated deficiency fees to be paid by the buyer. Of the total consideration, $208 million is considered a noncash investing activity for the six months ended June 30, 2019. The Company recorded a loss of $521 million and recognized employee-related charges of $19 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
Contingent Consideration. The Company is entitled to receive contingent consideration of up to $450 million based on future annual oil and NGL prices during each of the years from 2020 to 2024. The Company used an option pricing model to determine the fair value of the contingent consideration as of the date of the sale, which resulted in an estimated fair value of $136 million. The fair value of the contingent consideration is classified as noncurrent other assets in the consolidated balance sheets. The Company will revalue the contingent consideration each reporting period, with any valuation changes being recorded as net interest and other income (loss) in the consolidated statements of operations for such period. See Note 4 and Note 5 for additional information.
Deficiency Fee Obligation and Receivable. The Company transferred its long-term midstream agreements and associated minimum volume commitments (“MVC”) to the buyer. However, the Company retained the obligation to pay 100 percent of any deficiency fees associated with the MVC's from January 2019 through July 2022. The buyer is required to reimburse the Company for up to 20 percent of the deficiency fees paid from January 2019 through July 2022. Such reimbursement will be paid by the buyer in installments beginning in 2023 through 2025. The Company classified $106 million as other current liabilities and $242 million as other noncurrent liabilities as of the date of the sale, which represents the probability weighted present value of the estimated future deficiency fee obligation. The Company utilized a credit risk-adjusted valuation model to determine the present value of the estimated deficiency fee receivable of $72 million attributable to future deficiency fees that will be reimbursed by the buyer as of the date of

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

the sale. The deficiency fee receivable is classified as noncurrent other assets in the consolidated balance sheet. Changes to the deficiency fee obligation and receivable are expected to primarily result from accretion over the term of the arrangements; however, adjustments could also result from changes in the buyer's development plan and future drilling and production results.
Restricted Cash. As of the date of the sale, the Company deposited $75 million into an escrow account to be used to fund future deficiency fee payments. Accordingly, the $75 million is classified as restricted cash in the consolidated balance sheet as of June 30, 2019. Beginning in 2021, the required escrow balance will decline to $50 million and, to the extent that there is any remaining balance after the payment of deficiency fees, the balance will become unrestricted and revert to the Company on March 31, 2023.
In December 2018, the Company completed the sale of its pressure pumping assets to ProPetro Holding Corp. ("ProPetro") in exchange for total consideration of $282 million, comprised of 16.6 million shares of ProPetro's common stock, which was delivered as of the date of the sale and had a fair value of $172 million, and $110 million in cash, which was received during the first quarter of 2019.
During 2018, the Company recorded a gain of $30 million, employee-related charges of $19 million, contract termination charges of $13 million and other divestiture related charges of $6 million associated with the sale. See Note 12 for additional information.
During the six months ended June 30, 2019, the Company reduced the gain associated with the sale by $10 million and recorded additional employee-related charges of $2 million.
In July 2018, the Company completed the sale of its gas field assets in the Raton Basin to an unaffiliated third party for net cash proceeds of $54 million, after normal closing adjustments. The Company recorded a noncash impairment charge of $77 million in June 2018 to reduce the carrying value of its Raton Basin assets to their estimated fair value less costs to sell as the assets were considered held for sale.
During 2018, the Company recorded a gain of $2 million associated with the sale. The Company also recorded other divestiture-related charges of $117 million, including $111 million of estimated deficiency charges related to certain firm transportation contracts retained by the Company and employee-related charges of $6 million. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
In April 2018, the Company completed the sale of approximately 10,200 net acres in the West Eagle Ford Shale gas and liquids field to an unaffiliated third party for net cash proceeds of $100 million, after normal closing adjustments.
During 2018, the Company recorded a gain of $75 million associated with the sale. Additionally, the Company reduced the carrying value of goodwill by $1 million, reflecting the portion of the Company's goodwill related to the assets sold.
Decommissioning
In November 2018, the Company announced plans to close its sand mine located in Brady, Texas and transition its proppant supply requirements to West Texas sand sources. During the six months ended June 30, 2019, the Company recorded $23 million of accelerated depreciation and $17 million of inventory and other property and equipment impairment charges associated with the sand mine closure.
Restructuring
During the six months ended June 30, 2019, the Company implemented a corporate restructuring program to align its cost structure with the needs of a Permian Basin-focused company. The restructuring occurred in three phases (collectively, the "Corporate Restructuring Program") as follows:
In March 2019, the Company made certain changes to its leadership and organizational structure, which included the early retirement and departure of certain officers of the Company,

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

In April 2019, the Company adopted a voluntary separation program (“VSP”) for certain eligible employees, and
In May 2019, the Company implemented an involuntary separation program ("ISP").
During the three and six months ended June 30, 2019, the Company recorded $146 million and $158 million, respectively, of employee-related charges associated with the Corporate Restructuring Program. See Note 15 for additional information.
The employee-related costs are primarily recorded as other expense in the consolidated statements of operations. Obligations associated with employee-related charges are classified as accounts payable - due to affiliates in the consolidated balance sheets.
The changes in the Company's total employee-related obligations are as follows:
 
Six Months Ended
June 30, 2019
 
(in millions)
Beginning employee-related obligations
$
27

Additions (Note 15)
156

Cash payments
(89
)
Ending employee-related obligations
$
94


NOTE 4. Fair Value Measurements
The Company determines fair value based on the price that would be received from selling an asset or 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 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 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, typically reflecting management's estimate of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore, determined using model-based techniques, including discounted cash flow models.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows:
 
As of June 30, 2019
 
Fair Value Measurement
 
 
 
Quoted Prices in
Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Commodity price derivatives
$

 
$
59

 
$

 
$
59

Deferred compensation plan assets
88

 

 

 
88

Investment in affiliate
344

 

 

 
344

Divestiture contingent consideration

 
123

 


 
123

Total assets
432

 
182

 

 
614

Liabilities:
 
 
 
 
 
 
 
Commodity price derivatives

 
15

 

 
15

 
$
432

 
$
167

 
$

 
$
599


 
As of December 31, 2018
 
Fair Value Measurement
 
 
 
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Commodity price derivatives
$

 
$
52

 
$

 
$
52

Deferred compensation plan assets
82

 

 

 
82

Investment in affiliate

 
172

 

 
172

Total assets
82

 
224

 

 
306

Liabilities:
 
 
 
 
 
 
 
Commodity price derivatives

 
27

 

 
27

 
$
82

 
$
197

 
$

 
$
279


Commodity price derivatives. The Company's commodity price derivatives represent oil, NGL and gas swap contracts, collar contracts, collar contracts with short puts and basis swap contracts. The asset and liability measurements for the Company's commodity price derivative contracts are determined using Level 2 inputs. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity price derivatives.
The asset and liability values attributable to the Company's commodity price 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 include investments in equity and mutual fund securities that are actively traded on major exchanges. The fair values of these investments are determined using Level 1 inputs based on observable prices on major exchanges.
Investment in affiliate. The Company elected the fair value option for measuring its equity method investment in ProPetro. The fair value of its investment in ProPetro is determined using Level 1 inputs based on observable prices on a major exchange. Prior to June 30, 2019, the fair value of the Company's investment in ProPetro was determined using Level 2 inputs, including the

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

quoted market price for the stock as adjusted to reflect a discount due to restrictions on the Company's ability to sell prior to July 1, 2019. See Note 12 and Note 14 for additional information.
Divestiture contingent consideration. In May 2019, the Company completed the South Texas Divestiture and is entitled to receive contingent consideration of up to $450 million based on future oil and NGL prices during each of the years from 2020 to 2024. The Company uses an option pricing model to estimate the fair value of the contingent consideration using significant Level 2 inputs that include quoted future commodity prices based on active markets, implied volatility factors and counterparty credit risk assessments. See Note 3 and Note 5 for additional information.    
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.
Other assets. During the six months ended June 30, 2019, the Company impaired the remaining $17 million of inventory and other property and equipment related to the decommissioning of the Company's Brady, Texas sand mine, as these assets had no remaining future economic value. In addition, the Company recognized a $16 million impairment charge related to pressure pumping assets excluded from the December 2018 sale of the Company's pumping services assets. See Note 15 for additional information.
South Texas Divestiture. In May 2019, the Company recorded an estimated deficiency fee obligation of $348 million and related estimated deficiency fee receivable of $72 million attributable to the South Texas Divestiture. The fair value of the deficiency fee obligation and deficiency fee receivable was determined using Level 3 inputs. The Company's estimates are based on a probability-weighted forecast that considers historical results, market conditions and various development plans to arrive at the estimated present value of the deficiency payments that will be required to be paid by the Company and the corresponding receivable that will be due from the buyer. The present value of the future cash payments and expected cash receipts were determined using a 2.9 percent and 3.2 percent discount rate, respectively, based on the timing of future payments and receipts and the Company's counterparty credit risk assessments. See Note 3 and Note 11 for additional information.
Sale of Raton Basin assets. In June 2018, the Company recognized impairment charges of $77 million to reduce the carrying value of its Raton Basin gas field assets to the agreed upon sales price for these assets, which were sold in July 2018. The impairment charges included $65 million attributable to proved oil and gas properties and $12 million attributable to other property and equipment. The impairment charges were recorded as impairment of oil and gas properties in the consolidated statement of operations. The Company also recorded contract termination charges of $111 million attributable to estimated deficiency fees related to certain firm transportation contracts retained by the Company. The fair value of these contracts was determined using Level 2 inputs, including an annual discount rate of 4.4 percent, to discount the expected future cash flows. See Note 3 and Note 11 for additional information.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheets are as follows:
 
As of June 30, 2019
 
As of December 31, 2018
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash (a)
$
643

 
643

 
$
775

 
$
775

Time deposits (a)

 

 
50

 
50

Total
$
643

 
$
643

 
$
825

 
$
825

Restricted cash (a)
$
75

 
75

 

 
$

Short-term investments:
 
 
 
 
 
 
 
Commercial paper (b)
$

 

 
$
53

 
53

Corporate bonds (c)

 

 
290

 
288

Time deposits (b)

 

 
100

 
100

Total
$

 
$

 
$
443

 
$
441

Long-term investments:
 
 
 
 
 
 
 
Corporate bonds (c)
$

 
$

 
$
125

 
$
125

Liabilities:
 
 
 
 
 
 
 
Current portion of long-term debt (d)
$
449

 
$
462

 
$

 
$

Long-term debt (d)
$
1,837

 
$
1,986

 
$
2,284

 
$
2,374


______________________
(a)
Fair value approximates carrying value due to the short-term nature of the instruments.
(b)
Fair value is determined using Level 2 inputs.
(c)
Fair value is determined using Level 1 inputs.
(d)
Fair value is determined using Level 2 inputs. The Company's senior notes are quoted but not actively traded on major exchanges; therefore, fair value is based on periodic values as quoted on major exchanges.
The Company has other financial instruments consisting primarily of receivables, payables, operating leases 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.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

NOTE 5. Derivative Financial Instruments
The Company utilizes commodity swap contracts, option contracts, collar contracts, collar contracts with short puts and basis swap contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's 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.
Oil production derivatives. The Company sells its oil production at the lease and the sales contracts governing such oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company also enters into pipeline capacity commitments in order to secure available oil transportation capacity from its areas of production to the Gulf Coast. In order to diversify the oil price it receives, the Company (i) enters into oil purchase transactions with third parties in its areas of production that are consistent with the oil prices that the Company receives at the lease, adjusted for transportation costs to the point of purchase, (ii) transports the purchased oil using its pipeline capacity to the Gulf Coast and (iii) enters into third party sale transactions to sell the oil into the Gulf Coast refinery or international export markets at prices that are highly correlated with Brent oil prices. As a result, the Company will generally use Brent derivative contracts to manage future oil price volatility.
Volumes per day associated with the Company's outstanding oil derivative contracts as of June 30, 2019 and the weighted average oil prices for those contracts are as follows:
 
2019
 
Year Ending December 31, 2020
 
Third Quarter
 
Fourth Quarter
 
Brent swap contracts:
 
 
 
 
 
Volume per day (Bbl)
20,000

 

 

Price per Bbl
$
64.32

 
$

 
$

Brent collar contracts with short puts:
 
 
 
 
 
Volume per day (Bbl) (a)
45,000

 
45,000

 
43,500

Price per Bbl:
 
 
 
 
 
Ceiling
$
80.06

 
$
80.06

 
$
72.99

Floor
$
68.33

 
$
68.33

 
$
64.13

Short put
$
58.33

 
$
58.33

 
$
55.00

____________________
(a)
Subsequent to June 30, 2019, the Company entered into additional Brent derivative contracts for (i) 13,261 Bbls per day of swap contracts for August through September 2019 production and 20,000 Bbls per day of swap contracts for October through December 2019 production, both at an average swap price of $65.44 per Bbl and (ii) 23,000 Bbls per day of collar contracts with short puts for 2020 production with a ceiling price of $70.60, a floor price of $62.57 and a short put price of $54.39.
NGL production derivatives. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to Mont Belvieu, Texas NGL component product prices. The Company uses derivative contracts to manage the NGL component product price volatility. As of June 30, 2019, the Company did not have any NGL derivative contracts outstanding.
Gas production derivatives. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("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 actual index prices at which the gas is sold.

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PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)

Volumes per day associated with outstanding gas derivative contracts and the weighted average gas prices for those contracts are as follows: 
 
As of June 30, 2019
 
2019
 
Third Quarter
 
Fourth Quarter
Swap contracts:
 
 
 
Volume per day (MMBtu)
50,000

 
16,848

Price per MMBtu
$
2.94

 
$
2.94

Basis swap contracts:
 
 
 
Permian Basin index swap volume per day(MMBtu) (a)
60,000

 

Price differential ($/MMBtu)
$
(1.46
)
 
$

Southern California index swap volume per day (MMBtu) (b)
80,000

 
80,000

Price differential ($/MMBtu)
$
0.31

 
$
0.31

____________________
(a)
The referenced basis swap contracts fix the basis differentials between the index price at which the Company sells its Permian Basin gas and the HH price used in swap contracts.
(b)
The referenced basis swap contracts fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in Arizona and southern California.
Divestiture contingent consideration. The Company's right to receive contingent consideration in conjunction with the South Texas Divestiture was determined to be a derivative financial instrument that is not designated as a hedging instrument. The contingent consideration of up to $450 million is based on oil and NGL prices during each of the years from 2020 to 2024. See Note 3 and Note 4 for additional information.