SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    Form 10-K


              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997


                         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                         (I.R.S. Employer
incorporation or organization)                         Identification No.)

1400 Williams Square West, 5205 N.  O'Connor Blvd., Irving, Texas      75039
(Address of principal executive offices)                             (Zip Code)

               Registrant's telephone number, including area code:
                                 (972) 444-9001

           Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of each exchange
 Title of each class                                   on which registered

 Common Stock..................................   New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act: None

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    X      NO

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate market value of the voting stock held by
  non-affiliates of the Registrant as of February 27, 1998....... $2,377,781,760

Number of shares of Common Stock outstanding as of
  February 27, 1998..............................................    100,899,720

                      Documents Incorporated by Reference:

(1)   Proxy Statement for Annual Meeting of Shareholders to be held May 21, 1998
      - Referenced in Part III of this report.






                        PIONEER NATURAL RESOURCES COMPANY

                              CROSS REFERENCE SHEET
              Pursuant to National Policy Statement No. 47 (Canada)
                        (Annual Information Form ("AIF"))


Item Number and Caption of AIF        Heading or Location in Form 10-K
- ------------------------------        --------------------------------
1.  Incorporation                     Item 1.   Business

2.  General Development of the        Item 1.   Business
    Business

3.  Narrative Description of the      Item 1.   Business
    Business                          Item 2.   Properties

4.  Selected Consolidated Financial   Item 6.   Selected Financial Data
    Information                       Item 8.   Financial Statements and
                                                Supplementary Data

5.  Management's Discussion and       Item 7.   Management's Discussion and
    Analysis                                    Analysis of Financial Conditions
                                                and Results of Operations

6.  Market for Securities             Item 5.   Market for Registrant's Common
                                                Stock and Related Stockholder
                                                Matters

7.  Directors and Officers            Item 10.  Directors and Executive Officers
                                                of the Registrant

8.  Additional Information            Item 10.  Directors and Executive Officers
                                                of the Registrant
                                      Item 11.  Executive Compensation
                                      Item 12.  Security Ownership of Certain
                                                Beneficial Owners and Management
                                      Item 13.  Certain Relationships and
                                                Related Transactions


                                        2





     Parts I and II of this  Report  contain  forward  looking  statements  that
involve risks and  uncertainties.  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 "Item 1.
Business - Competition,  Markets and  Regulation"  and "Item 1. Business - Risks
Associated  with Business  Activities" for a description of various factors that
could  materially  affect the ability of the Company to achieve the  anticipated
results described in the forward looking statements.

                                     PART I

     Unless  otherwise  specified,  all dollar  amounts are  expressed in United
States dollars.  Certain oil and gas terms used in this Report are defined under
"Item 1. Business - Definition of Certain Oil and Gas Terms".

ITEM 1.     BUSINESS

General

      Pioneer Natural Resources Company (the "Company") was formed in April 1997
as a Delaware  corporation  and,  prior to August 7, 1997, had not conducted any
significant  activities.  Effective  as of  August  7,  1997,  Parker &  Parsley
Petroleum  Company ("Parker & Parsley"),  formerly a Delaware  corporation,  and
MESA Inc.  ("Mesa"),  formerly a Texas  corporation,  completed  their  business
combination  pursuant to an Amended and  Restated  Agreement  and Plan of Merger
dated as of April 6, 1997 (the "Merger Agreement"), among Parker & Parsley, Mesa
and its  wholly-owned  subsidiaries,  the  Company  and Mesa  Operating  Company
("MOC"). The Company was significantly expanded by the subsequent acquisition of
the  Canadian  and  Argentine  oil and gas  business of Chauvco  Resources  Ltd.
("Chauvco"), a publicly traded independent oil and gas company based in Calgary,
Canada on December 18, 1997.

      In accordance with the provisions of Accounting  Principles  Board No. 16,
"Business  Combinations",  both the  merger  with  Mesa and the  acquisition  of
Chauvco have been accounted for as purchases by the Company  (formerly  Parker &
Parsley). As a result, the historical  financial,  reserve and other statistical
information  for the  Company are those of Parker & Parsley,  and the  Company's
financial,  reserve and other  statistical  information  present the addition of
Mesa's  and  Chauvco's  assets and  liabilities  as an  acquisition  by Parker &
Parsley in August and December 1997, respectively.

      The Company's  proved  reserves at December 31, 1997 totaled 761.6 million
BOE,  representing $3.1 billion in SEC 10 Value. Of the total, domestic reserves
represent 81% of the BOEs and 82% of the SEC 10 Value.

      The  Company's  business  activities  are conducted  through  wholly-owned
subsidiaries and are comprised of the business  activities formerly conducted by
Parker & Parsley, Mesa and Chauvco.  Domestic drilling and production operations
are principally located in Texas, Kansas,  Oklahoma,  Louisiana,  New Mexico and
offshore  Gulf  of  Mexico.  The  Company  also  owns  interests  in oil and gas
properties in Argentina and Canada.

      The Company's  executive offices are located at 1400 Williams Square West,
5205 N. O'Connor Blvd.,  Irving,  Texas 75039, and its telephone number at those
offices is (972) 444-9001. The Company maintains division offices in Midland and
Houston,  Texas, Oklahoma City, Oklahoma,  Buenos Aires,  Argentina and Calgary,
Canada. At December 31, 1997, the Company had 1,321 employees, 399 of which were
employed in field and plant operations.

Mission and Strategies

      The  Company's  mission  is to  provide  its  shareholders  with  superior
long-term  profitability  and value. The "opportunity  driven"  strategies to be
employed to achieve this mission will include:  (a)  developing  and  increasing
production from existing  properties through low-risk  development  drilling and
other  activities,  (b)  concentrating  on defined  geographic  areas to achieve
operating and technical efficiencies, (c) pursuing strategic acquisitions in the
Company's core areas that will complement the Company's  existing asset base and
that will provide  additional growth  opportunities,  (d) utilizing or acquiring
technological  and  operating   efficiencies  to  selectively  expand  into  new
geographic    areas   that   feature    producing    properties    and   provide
exploration/exploitation   opportunities,   (e)  allocating  the  personnel  and
technology necessary to increase the Company's  exploration  opportunities,  (f)
maintaining financial  flexibility to take advantage of additional  exploration,
development and  acquisition  opportunities and  (g) encouraging  high levels of

                                        3





equity  ownership  among senior managers and the Company's Board of Directors to
further  align the  interests of  management  and  shareholders.  The Company is
committed to continuing to enhance  shareholder value through adherence to these
strategies.

Business Activities

Production

      The Company  focuses  its  efforts  toward  increasing  its average  daily
production of oil and gas through development drilling,  production  enhancement
activities and acquisitions of producing  properties.  Average daily oil and gas
production  have each increased every year since 1991 with the exception of 1996
when average daily production declined due to significant property dispositions.
In spite of production  decreases due to property sales,  the Company's  efforts
towards  production  growth have been largely  successful as  illustrated by the
five-year average daily production growth rates. Comparing 1992 to 1997, average
daily oil  production  has increased  279% and average daily gas  production has
increased 327%, while  production  costs per BOE have declined 30%.  Production,
price and cost information with respect to the Company's  properties for each of
1997, 1996 and 1995 is set forth under  "Item 2. Properties  - Selected  Oil and
Gas Information - Production, Price and Cost Data".

Drilling Activities

      The Company  seeks to increase its oil and gas  reserves,  production  and
cash  flow by  concentrating  on  drilling  low-risk  development  wells  and by
conducting  additional  development  activities such as recompletions.  From the
beginning  of 1993  through  the end of 1997,  the Company  drilled  2,351 gross
(1,585 net) wells, 94% of which were successfully completed as productive wells,
at a total cost (net to the Company's  interest) of $938  million.  During 1997,
the  Company  drilled  592 gross  (405 net)  wells for a total  cost (net to the
Company's  interest) of  approximately  $343 million,  72% of which was spent on
development  wells and related  facilities.  The Company's  current 1998 capital
expenditure  budget is $500 million  which the Company has allocated as follows:
$301 million to exploitation activities,  $125 million to exploration activities
and $74 million to oil and gas property  acquisitions.  This capital expenditure
budget reflects the Company's plans to drill approximately 600 development wells
and 95 exploratory wells and to perform recompletions on over 200 wells.

      The Company believes that its current property base provides a substantial
inventory of prospects for continued  reserve,  production and cash flow growth.
The  Company's  domestic  reserves  as  of  December  31,  1997  include  proved
undeveloped and proved developed  nonproducing  reserves of 71.9 million Bbls of
oil and NGLs and 395.6 Bcf of gas.  Development of these reserves is anticipated
to occur  principally  in 1998 and 1999.  The Company  believes that its current
portfolio  of  undeveloped   prospects  provides   attractive   development  and
exploration opportunities for at least the next three to five years.

Exploratory Activities

      Since 1995,  the Company has  dedicated an  increasing  percentage  of its
annual  exploration/exploitation  capital budget to exploratory projects, 17% in
1995,  18% in 1996 and 28% in 1997.  The  Company  will  continue  to allocate a
significant portion of its capital budget to its exploration  opportunities with
a focus on generating a portfolio of short to medium term impact  projects.  The
Company   currently   anticipates   that   approximately   29%   of   its   1998
exploration/exploitation  capital budget will be spent on exploratory  projects.
The majority of the 1998 exploratory budget is allocated to domestic  activities
in the Gulf Coast region and  internationally  in Africa,  Argentina and Canada.
Exploratory  drilling  involves  greater  risks of dry holes or  failure to find
commercial  quantities of  hydrocarbons  than  development  drilling or enhanced
recovery  activities.  See "Item 1.  Business - Risks  Associated  with Business
Activities - Risks of Drilling Activities" below.

Asset Divestitures

      The  Company  regularly  reviews  its  property  base for the  purpose  of
identifying nonstrategic assets, the disposition of which would increase capital
resources   available  for  other  activities  and  create   organizational  and
operational efficiencies. While the Company generally does not dispose of assets

                                        4





solely for the purpose of reducing debt, such  dispositions  can have the result
of furthering the Company's objective of financial flexibility through decreased
debt levels.

      For the year ended  December 31, 1997,  the  Company's  asset  disposition
activity primarily  consisted of the sale of certain domestic assets,  primarily
oil and gas properties,  for proceeds of $114.1 million, which resulted in a net
gain of $4.3 million and the sale of the Company's  subsidiary with an ownership
interest in oil and gas properties in Turkey for proceeds of $1.6 million, which
resulted in the  recognition of a gain of $706  thousand.  During the year ended
December  31,  1996,  the Company sold  certain  wholly-owned  subsidiaries  for
proceeds of $183.2  million  resulting  in a pre-tax  gain of $83.3  million and
certain nonstrategic domestic assets for proceeds of $58.4 million that resulted
in the  recognition  of a pre-tax net gain of $13.8  million.  During 1995,  the
Company divested certain assets, primarily oil and gas properties,  for proceeds
of $175.1  million  that  resulted in a pre-tax net gain of $16.6  million.  The
proceeds  from  the  asset  dispositions  were  used  to  reduce  the  Company's
outstanding  bank  indebtedness  and to  provide  funding  for a portion  of the
Company's capital expenditures, including purchases of oil and gas properties in
the Company's core areas.

      In February  1998,  the Company  announced its intentions to sell domestic
nonstrategic  properties for proceeds  ranging from $375 to $550 million.  These
properties  represent  approximately  15% of the Company's  total cash flow from
operations. The Company plans to complete this divestiture in the latter part of
1998.  The proceeds will be initially  used to reduce the Company's  outstanding
indebtedness  and  subsequently  to provide  funding for the  Company's  capital
expenditures program. This will leave the Company with approximately 25 domestic
fields,  which represent the Company's core producing assets with  complementary
development  opportunities  and the  Company's  assets with  significant  future
exploration opportunities.

      The  consummation of the Company's 1998  divestiture  plans and any future
divestiture  plans is entirely  dependent on finding one or more willing  buyers
who have the financial  wherewithal  to complete  such a purchase.  Until such a
buyer is found,  the Company may  reevaluate  its portfolio of properties and at
any time may adjust its plans concerning divestitures. As a result, there can be
no assurance  that the  divestiture  of any or all of these  properties  will be
completed or that the estimated proceeds will be realized.

Acquisition Activities

      General. The Company regularly seeks to acquire properties that complement
its  operations  and provide  exploitation  and  development  opportunities  and
cost-reduction   potential.   In  addition,   the  Company   pursues   strategic
acquisitions  that will allow the Company to expand into new geographical  areas
that  feature   producing   properties   and  provide   exploration/exploitation
opportunities.  During 1997, the Company completed three major transactions: the
merger with Mesa for total  consideration of $991.0 million,  the acquisition of
Chauvco for total  consideration of $696.4 million and the acquisition of assets
from America Cometra for total consideration of $130 million. These acquisitions
added  significantly  to the  Company's  exploratory  and  development  drilling
opportunities,  balanced the Company's  reserve mix between oil and natural gas,
increased the scale of its operations in the MidContinent  region,  the offshore
Gulf Coast  region,  Argentina  and  Canada  and  provided  the  Company  with a
significant  base of  operations  and  experienced  personnel  for its  areas of
geographic  focus,  including  international  areas.  During 1996 and 1995,  the
Company  reduced its  previous  emphasis  on major  acquisitions  and,  instead,
concentrated  its efforts on maximizing the value from its existing  properties.
However, the Company continued its program of smaller acquisitions of properties
that exhibit one or more of the following  characteristics:  properties that are
near or otherwise complement the Company's existing properties,  properties that
represent  additional  working  interests  in  Company-operated   properties  or
properties  that provide the Company with strategic  exploitation or exploration
opportunities.  In  1996  and  1995,  aggregate  expenditures  to  acquire  such
interests  and  properties  amounted  to  approximately  $21  million  and $48.5
million, respectively.

      Future  Acquisition  Opportunities.  The  Company  regularly  pursues  and
evaluates  acquisition   opportunities   (including   opportunities  to  acquire
particular oil and gas  properties or related assets or entities  owning oil and
gas  properties  or  related  assets  and  opportunities  to engage in  mergers,
consolidations  or other  business  combinations  with such entities) and at any
given time may be in  various  stages of  evaluating  such  opportunities.  Such
stages may take the form of  internal  financial  analysis,  oil and gas reserve
analysis,   due  diligence,   the  submission  of  an  indication  of  interest,
preliminary negotiations,  negotiation of a letter of intent or negotiation of a
definitive agreement.

                                        5





Financial Management

      The Company strives to maintain its outstanding indebtedness at a moderate
level  in  order  to  provide  sufficient   financial   flexibility  for  future
exploration,  development and acquisition  opportunities.  While the Company may
occasionally  incur higher  levels of debt to take  advantage of  opportunities,
management's  objective  is to  maintain a  flexible  capital  structure  and to
strengthen the Company's financial position by reducing debt through an increase
in equity capital or through the divestiture of nonstrategic assets.

      As with any organization,  the Company has experienced various debt levels
in recent years as it has responded to strategic opportunities.  During 1996 and
1995,  the Company took  deliberate  actions to reduce its debt levels or extend
its debt maturities in order to improve its financial  flexibility and enable it
to take  advantage of future  strategic  opportunities.  The Company was able to
reduce  its debt  level  significantly  each year  through  the  application  of
proceeds  from the  dispositions  of assets that the Company had  identified  as
nonstrategic (see "Asset Divestitures" above). In 1997, the Company's debt level
increased as a result of the  assumption  of the debt of Mesa and Chauvco.  Also
during 1997,  the Company  recorded a noncash  pre-tax charge of $1.4 billion in
accordance with SFAS 121 as defined in Note B of Notes to Consolidated Financial
Statements included in "Item 8. "Financial  Statements and Supplementary  Data".
As a result of the decrease in capital and the increase in debt,  the  Company's
debt as a percentage  of total  capitalization  was 56% at December 31, 1997, up
from 31% at December 31, 1996.

      In January  1998,  the  Company  completed  the  issuance of two series of
senior notes for total net proceeds of $593 million.  The first issuance was for
$350  million  of ten year  notes  with a coupon  rate of 6.5%,  and the  second
issuance  was for $250  million of thirty year notes with a coupon rate of 7.2%.
The proceeds were used  primarily to repay the Company's bank  indebtedness  and
had the effect of extending the Company's debt maturities.

Marketing of Production

      General.  Production from the Company's  properties is marketed consistent
with industry practices,  which include the sale of oil at the wellhead to third
parties and the sale of gas to third parties.  Sales prices for both oil and gas
production are negotiated based on factors  normally  considered in the industry
such as the spot price for gas or the posted price for oil,  price  regulations,
distance  from the well to the  pipeline,  well  pressure,  estimated  reserves,
commodity quality and prevailing supply conditions.

      Significant Purchasers.  During 1997, the Company's two primary purchasers
of crude oil were Mobil Oil  Corporation  ("Mobil")  and Genesis Crude Oil, L.P.
("Genesis"),  both of which  purchase oil pursuant to contracts that provide for
prices that are based on prevailing market prices.  Approximately 16% and 23% of
the Company's 1997 oil and gas revenues were  attributable to sales to Mobil and
Genesis,  respectively.  During  1997,  the Company  marketed  its natural  gas,
including  natural gas products,  to a variety of purchasers.  Approximately 11%
and 10% of the Company's 1997 oil and gas revenues were attributable to sales to
Producers Energy Marketing,  LLC and Western Gas Resources,  Inc., respectively.
The Company is of the opinion that the loss of any one purchaser  would not have
an adverse  effect on its ability to sell its oil and gas  production or natural
gas products.

      Hedging  Activities.   The  Company  periodically  enters  into  commodity
derivative  contracts  (swaps,  futures and  options) in order to (i) reduce the
effect  of the  volatility  of price  changes  on the  commodities  the  Company
produces and sells,  (ii) support the  Company's  annual  capital  budgeting and
expenditure  plans and (iii) lock in prices to protect the economics  related to
certain  capital  projects.  The hedging  strategy  for each product the Company
sells is described in further detail below.

      Crude Oil. All material  purchase  contracts  governing  the Company's oil
production  are tied directly or  indirectly  to NYMEX  prices.  The average oil
prices per Bbl that the Company  reports  includes  the effects of oil  quality,
gathering and transportation costs and the net effect of the oil hedges.

      Natural Gas Liquids.  The Company  employs a policy of hedging natural gas
liquids  based  on  actual  product  prices  in order  to  mitigate  some of the
volatility  associated  with NYMEX  pricing.  Natural gas liquids are sold under
long-term  contracts  which provide price  flexibility  and allow the Company to
maximize prices between trading hubs.

                                        6





      Natural Gas. The Company employs a policy of hedging gas production  based
on the index price upon which the gas is actually  sold in order to mitigate the
basis risk between NYMEX prices and actual index prices.  The average gas prices
per Mcf that the Company reports includes the effects of Btu content,  gathering
and transportation costs, gas processing and shrinkage and the net effect of the
gas hedges.

      See Item 7. "Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations"  for a description  of the Company's  results of its
hedging activities and Item 8. "Financial Statements and Supplementary Data" for
a description of the Company's open hedge positions at December 31, 1997 and the
related prices to be realized.

Operations by Geographic Area

      The Company  operates in one industry  segment.  During 1997 and 1996, the
Company did not have  significant  operations in geographic areas other than the
United  States.  For financial  information  with respect to the Company's  1995
operations by geographic  area,  see Note O of Notes to  Consolidated  Financial
Statements included in "Item 8.
Financial Statements and Supplementary Data".

Competition, Markets and Regulation

      Competition.  The oil and gas  industry  is  highly  competitive.  A large
number  of  companies  and  individuals   engage  in  the  exploration  for  and
development of oil and gas properties, and there is a high degree of competition
for oil and gas properties suitable for development or exploration. Acquisitions
of oil and gas  properties  have  been an  important  element  of the  Company's
growth,  and the Company  intends to continue to acquire oil and gas properties.
The principal  competitive  factors in the acquisition of oil and gas properties
include the staff and data necessary to identify,  investigate and purchase such
properties  and the financial  resources  necessary to acquire and develop them.
Many of the Company's  competitors are  substantially  larger and have financial
and other resources greater than those of the Company.

      Markets.  The  Company's  ability  to  produce  and  market  oil  and  gas
profitably depends on numerous factors beyond the Company's control.  The effect
of these factors cannot be accurately predicted or anticipated. In recent years,
worldwide oil production  capacity and gas production  capacity in certain areas
of the United States have exceeded demand,  with resulting declines in the price
of oil and gas.  Although the Company  cannot  predict the  occurrence of events
that may  affect  oil and gas  prices or the  degree to which oil and gas prices
will be  affected,  it is  possible  that  prices for any oil or gas the Company
produces will be lower than those currently  available.  Any significant decline
in the  price of oil or gas  would  adversely  affect  the  Company's  revenues,
profitability and cash flow and could, under certain circumstances,  result in a
reduction in the carrying value of the Company's oil and gas properties.

      During  most of 1996 and 1997,  the  Company  benefitted  from  higher oil
prices as compared  to previous  years.  However,  during the fourth  quarter of
1997,  oil prices began a downward  trend that has continued  into March 1998. A
continuation of the oil price environment  experienced  during the first quarter
of 1998 will have an adverse effect on the Company's revenues and operating cash
flow,  and may result in a downward  adjustment  to the  Company's  current 1998
capital budget of $500 million.  Also, a continuing  decline in oil prices could
result in  additional  decreases in the carrying  value of the Company's oil and
gas properties.

      Governmental  Regulation.  Oil  and gas  exploration  and  production  are
subject to various  types of  regulation  by local,  state,  federal and foreign
agencies.  The Company's  operations are also subject to state conservation laws
and regulations,  including provisions for the unitization or pooling of oil and
gas properties,  the establishment of maximum rates of production from wells and
the  regulation  of  spacing,  plugging  and  abandonment  of wells.  Each state
generally  imposes a production or severance tax with respect to production  and
sale of oil and gas within their respective jurisdictions. The regulatory burden
on the oil and gas industry  increases the Company's cost of doing business and,
consequently, affects its profitability.

      The Outer  Continental  Shelf Lands Act (the  "OCSLA")  requires  that all
pipelines operating on or across the Outer Continental Shelf (the "OCS") provide
open-access,  nondiscriminatory  service. Although the Federal Energy Regulatory
Commission  ("FERC") has chosen not to impose the  regulations of Order No. 509,
which implements the OCSLA, on gatherers and other  nonjurisdictional  entities,
FERC has retained  the authority to exercise jurisdiction over those entities if

                                        7





necessary to permit nondiscriminatory access to service on the OCS. In addition,
gathering  lines are currently  exempt from FERC's  jurisdiction,  regardless of
whether they are on the OCS, but FERC could eliminate this exception. Commencing
May 1994, FERC issued a series of orders in individual  cases that delineate its
current  gathering  policy.  FERC's  gathering policy was retained and clarified
with regard to deep water offshore facilities in a statement of policy issued in
February  1996.  FERC's new gathering  policy does not address its  jurisdiction
over  pipelines  operating on or across the OCS  pursuant to the OCSLA.  If FERC
were to apply Order No. 509 to gatherers on the OCS,  eliminate the exemption of
gathering lines and redefine its jurisdiction  over gathering lines,  these acts
could result in a reduction in available pipeline space for existing shippers in
the Gulf of Mexico and elsewhere, such as the Company.

      The United States Minerals Management Service (the "MMS") is conducting an
inquiry into certain  contract  settlement  agreements  from which  producers on
federal oil and gas leases have received settlement proceeds that the MMS claims
are royalty-bearing and into the extent to which producers have paid appropriate
royalty on those proceeds.

      Additional  proposals  and  proceedings  that might affect the oil and gas
industry are considered from time to time by Congress,  FERC,  state  regulatory
bodies, the courts and foreign  governments.  The Company cannot predict when or
if any such  proposals  might become  effective or their effect,  if any, on the
Company's operations.

      Environmental and Health Controls. The Company's operations are subject to
numerous  federal,  state,  local and foreign laws and  regulations  relating to
environmental and health protection.  These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the type, quantities
and  concentration  of  various   substances  that  can  be  released  into  the
environment  in connection  with drilling and  production  activities,  limit or
prohibit drilling activities on certain lands lying within wilderness,  wetlands
and other  protected  areas and impose  substantial  liabilities  for  pollution
resulting  from oil and gas  operations.  These  laws and  regulations  may also
restrict air or other  discharges  resulting  from the  operation of natural gas
processing plants,  pipeline systems and other facilities that the Company owns.
Although  the Company  believes  that  compliance  with  environmental  laws and
regulations  will not have a material  adverse effect on operations or earnings,
risks  of  substantial  costs  and  liabilities  are  inherent  in oil  and  gas
operations,   and  there  can  be  no  assurance  that  significant   costs  and
liabilities,  including  potential  criminal  penalties,  will not be  incurred.
Moreover, it is possible that other developments, such as stricter environmental
laws and regulations or claims for damages to property or persons resulting from
the Company's operations, could result in substantial costs and liabilities.

      The Comprehensive Environmental Response,  Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct,  on certain classes of persons
with respect to the release of a  "hazardous  substance"  into the  environment.
These persons  include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
hazardous  substances  released at the site. Persons who are or were responsible
for  releases of hazardous  substances  under CERCLA may be subject to joint and
several  liability  for the costs of cleaning up the hazardous  substances  that
have been released into the  environment  and for damages to natural  resources,
and it is not uncommon for  neighboring  landowners  and other third  parties to
file claims for personal  injury and  property  damage  allegedly  caused by the
hazardous substances released into the environment.

      The Company generates wastes, including hazardous wastes, that are subject
to the federal  Resource  Conservation  and Recovery Act ("RCRA") and comparable
state  statutes.  The U.S.  Environmental  Protection  Agency and various  state
agencies have limited the approved methods of disposal for certain hazardous and
nonhazardous wastes. Furthermore,  certain wastes generated by the Company's oil
and  natural  gas  operations  that  are  currently  exempt  from  treatment  as
"hazardous  wastes" may in the future be designated  as "hazardous  wastes," and
therefore  be  subject  to more  rigorous  and  costly  operating  and  disposal
requirements.

      The Company currently owns or leases, and has in the past owned or leased,
properties that for many years have been used for the exploration and production
of oil and gas.  Although the Company has used operating and disposal  practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties  owned or leased by
the Company or on or under other locations where such wastes have been taken for
disposal.  In addition,  some of these  properties  have been  operated by third
parties whose  treatment and disposal or release of hydrocarbons or other wastes
was not  under the Company's  control.  These  properties and the wastes diposed

                                        8





thereon may be subject to CERCLA,  RCRA and  analogous  state  laws.  Under such
laws, the Company could be required to remove or remediate  previously  disposed
wastes or property  contamination or to perform remedial plugging  operations to
prevent future contamination.

      Federal regulations require certain owners or operators of facilities that
store or otherwise  handle oil,  such as the Company,  to prepare and  implement
spill prevention  control plans,  countermeasure  plans,  and facility  response
plans  relating to the possible  discharge of oil into surface  waters.  The Oil
Pollution  Prevention  Act of 1990  ("OPA")  amends  certain  provisions  of the
federal Water Pollution  Control Act of 1972,  commonly referred to as the Clean
Water Act ("CWA") and other  statutes as they pertain to the  prevention  of and
response  to oil  spills  into  navigable  waters.  The OPA  subjects  owners of
facilities to strict joint and several liability for all containment and cleanup
costs and certain other damages arising from a spill, including, but not limited
to,  the costs of  responding  to a release of oil to  surface  waters.  The CWA
provides  penalties  for any  discharges  of  petroleum  products in  reportable
quantities and imposes substantial  liability for the costs of removing a spill.
State laws for the control of water  pollution  also provide  varying  civil and
criminal  penalties and  liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground.

      OPA requires  responsible  parties to establish  and maintain  evidence of
financial  responsibility  to cover removal costs and damages  resulting from an
oil spill. OPA calls for a financial responsibility increase from $35 million to
$150 million to cover pollution cleanup for offshore facilities. In August 1993,
MMS, which has been charged with  implementing  certain  segments of OPA, issued
its  advanced  notice of  proposed  rulemaking  that  would  increase  financial
responsibility  requirements for offshore lessees and permittees to $150 million
as required by OPA. Due to the OPA's broad  definition  of "offshore  facility,"
the Company could become subject to the financial  responsibility  rule if it is
proposed and adopted;  to date,  however,  the MMS has not formally proposed the
financial  responsibility  regulations.  On May  9,  1995,  the  U.S.  House  of
Representatives  passed a bill that  would  lower the  financial  responsibility
requirements  applicable  to offshore  facilities  to $35 million  (the  current
requirement under the federal OCSLA).  The bill allows the limit to be increased
to $150  million  if a formal  risk  assessment  indicates  the  increase  to be
warranted.  It would also define "offshore facility" to include only coastal oil
and gas  properties.  A U.S.  Senate  bill that would  also lower the  financial
responsibility requirements for offshore facilities was passed in late 1995. The
Senate  bill would  reduce the scope of  "offshore  facilities"  subject to this
financial  assurance  requirement  to  those  facilities  seaward  of  the  U.S.
coastline that are engaged in drilling for,  producing or processing oil or that
have the  capacity  to  transport,  store,  transfer,  or handle more than 1,000
barrels  of oil at a time.  Currently,  the  House  and  Senate  bills are being
reconciled in Conference  Committee.  The Clinton  Administration  has indicated
support for these changes to the OPA financial responsibility requirements.  The
Company  cannot   predict  the  final  form  of  the  financial   responsibility
requirements that will be ultimately established, but any role that requires the
Company to establish evidence of financial  responsibility in the amount of $150
million  has  the  potential  to  have a  material  adverse  effect  on  Company
operations  and  earnings.  The  Company  does not  believe  that the rule to be
proposed by the MMS will be any more  burdensome  to it than it will be to other
similarly situated oil and gas companies.

      Many states in which the Company  operates have recently begun to regulate
naturally  occurring  radioactive  materials  ("NORM")  and NORM wastes that are
generated in connection with oil and gas exploration and production  activities.
NORM wastes  typically  consist of very low-level  radioactive  substances  that
become concentrated in pipe scale and in production equipment. State regulations
may require the testing of pipes and  production  equipment  for the presence of
NORM, the licensing of NORM-contaminated facilities and the careful handling and
disposal of NORM wastes.  The Company  believes  that the growing  regulation of
NORM will have a minimal effect on the Company's  operations because the Company
generates only a very small quantity of NORM on an annual basis.

      The Company does not believe that its  environmental  risks are materially
different  from  those  of  comparable  companies  in the oil and gas  industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future,  result in a  curtailment  of  production  or  processing  or a material
increase in the costs of production,  development,  exploration or processing or
otherwise adversely affect the Company's operations and financial condition.

      The Company employs an  environmental  specialist  charged with monitoring
regulatory  compliance.  The Company performs an environmental review as part of
the due diligence work on potential acquisitions,  including acquisitions of oil
and gas properties. The Company is not aware of any material environmental legal
proceedings pending against it or any significant  environmental  liabilities to
which it may be subject.

                                        9





Risks Associated with Business Activities

      The nature of the business activities conducted by the Company subjects it
to certain hazards and risks. The following is a summary of some of the material
risks relating to the Company's business activities.

      Oil and Gas Prices and  General  Market  Risks.  The  Company's  revenues,
profitability,  cash flow and future rate of growth are highly  dependent on the
prevailing  prices of oil and gas, which are affected by numerous factors beyond
the Company's control.  Oil and gas prices historically have been very volatile.
A  substantial  or  extended  decline  in the  prices of oil or gas could have a
material adverse effect on the Company's  revenues,  profitability and cash flow
and could,  under certain  circumstances,  result in a reduction in the carrying
value of the Company's oil and gas  properties  and a reduction in the Company's
borrowing base under its bank credit facility.

      Risks of Drilling Activities.  As noted under "Item 1. Business - Business
Activities,"  of the total 1998  capital  budget of $500  million,  the  Company
anticipates spending  approximately $301 million on exploitation  activities and
$125 million on exploration activities. This capital expenditure budget reflects
the  Company's  plans  to  drill  approximately  600  development  wells  and 95
exploratory  wells and to  perform  recompletions  on over 200  wells.  Drilling
involves  numerous  risks,  including the risk that no  commercially  productive
natural  gas or oil  reservoirs  will be  encountered.  The  cost  of  drilling,
completing and operating wells is often uncertain and drilling operations may be
curtailed,  delayed or canceled  as a result of a variety of factors,  including
unexpected  drilling  conditions,  pressure  or  irregularities  in  formations,
equipment  failures or accidents,  adverse  weather  conditions and shortages or
delays in the delivery of equipment.  The Company's  future drilling  activities
may not be successful and, if  unsuccessful,  such failure could have an adverse
effect on the Company's  future results of operations  and financial  condition.
While all drilling, whether developmental or exploratory,  involves these risks,
exploratory  drilling  involves  greater  risks of dry holes or  failure to find
commercial  quantities  of  hydrocarbons.  Because  of  the  percentage  of  the
Company's capital budget devoted to exploratory  projects, it is likely that the
Company will continue to experience exploration and abandonment expense.

      Risks Associated with Unproved Properties.  At December 31, 1997 and 1996,
the  Company  had  unproved  property  costs  of $545  million  and $7  million,
respectively.  U.S.  GAAP  requires  periodic  evaluation  of  these  costs on a
project-by-project   basis  in  comparison  to  their  estimated  value.   These
evaluations will be affected by results of exploration activities,  future sales
or  expiration of all or a portion of such  projects.  If the quantity of proved
reserves  determined by such evaluations are not sufficient to fully recover the
cost  invested  in each  project,  the  Company  may be  required  to  recognize
significant non-cash charges in the earnings of future periods.  There can be no
assurance that economic reserves will be determined to exist for such projects.

      Acquisitions. Acquisitions of producing oil and gas properties have been a
key element of the Company's  growth.  The Company's  growth  following the full
development  of its existing  property  base could be impeded if it is unable to
acquire  additional oil and gas properties on a profitable basis. The success of
any  acquisition  will depend on a number of factors,  including  the ability to
estimate  accurately  the  recoverable  volumes  of  reserves,  rates of  future
production  and future  net  revenues  attributable  to  reserves  and to assess
possible  environmental  liabilities.  All of these  factors  affect  whether an
acquisition will ultimately generate cash flows sufficient to provide a suitable
return  on  investment.  Even  though  the  Company  performs  a  review  of the
properties  it seeks to acquire  that it believes is  consistent  with  industry
practices, such reviews are often limited in scope.

      Divestitures.  The Company  regularly  reviews its  property  base for the
purpose of  identifying  nonstrategic  assets,  the  disposition  of which would
increase   capital   resources   available  for  other   activities  and  create
organizational  and operational  efficiencies.  Various factors could materially
affect the ability of the Company to dispose of nonstrategic  assets,  including
the availability of purchasers  willing to purchase the  nonstrategic  assets at
prices acceptable to the Company.

      Risks  Associated  with  Operation of Natural Gas Processing  Plants.  The
Company owns interests in seven natural gas processing plants and operates three
of those plants,  although the net revenues  derived from natural gas processing
during  1997  represented  only 1% of the  total net  revenues  from oil and gas
activities. There are significant risks associated with the operation of natural
gas  processing  plants.  Natural gas and natural gas liquids are  volatile  and
explosive and may include  carcinogens.  Damage to or  misoperation of a natural


                                       10





gas  processing  plant could result in an  explosion  or the  discharge of toxic
gases,   which  could  result  in  significant  damage  claims  in  addition  to
interrupting a revenue source.

      Operating  Hazards and  Uninsured  Risks.  The  Company's  operations  are
subject to all the risks normally  incident to the oil and gas  exploration  and
production business, including blowouts, cratering, explosions and pollution and
other  environmental  damage, any of which could result in substantial losses to
the Company due to injury or loss of life,  damage to or  destruction  of wells,
production facilities or other property,  clean-up responsibilities,  regulatory
investigations and penalties and suspension of operations.  Although the Company
currently maintains insurance coverage that it considers  reasonable and that is
similar to that maintained by comparable  companies in the oil and gas industry,
it is not fully  insured  against  certain of these risks,  either  because such
insurance is not available or because of high premium costs.

      Environmental  Risks.  The  oil  and  gas  business  is  also  subject  to
environmental hazards, such as oil spills, gas leaks and ruptures and discharges
of toxic  substances  or gases that  could  expose  the  Company to  substantial
liability due to pollution and other environmental damage. A variety of federal,
state and foreign laws and regulations  govern the environmental  aspects of the
oil and gas business.  Noncompliance with these laws and regulations may subject
the Company to  penalties,  damages or other  liabilities,  and  compliance  may
increase the cost of the Company's  operations.  Such laws and  regulations  may
also  affect the costs of  acquisitions.  See "Item 1.  Business -  Competition,
Markets and Regulation - Environmental and Health Controls".

      The Company does not believe that its  environmental  risks are materially
different  from  those  of  comparable  companies  in the oil and gas  industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future,  result in a  curtailment  of  production  or  processing  or a material
increase in the costs of production,  development,  exploration or processing or
otherwise  adversely  affect the Company's  operations and financial  condition.
Pollution and similar environmental risks generally are not fully insurable.

      Competition.  The oil and gas industry is highly competitive.  The Company
competes with other  companies,  producers and operators for acquisitions and in
the exploration,  development,  production and marketing of oil and gas. Some of
these competitors have substantially  greater financial and other resources than
the Company. See "Item 1. Business - Competition, Markets and Regulation".

      Government Regulation. The Company's business is regulated by a variety of
federal,  state,  local  and  foreign  laws  and  regulations.  There  can be no
assurance  that  present or future  regulations  will not  adversely  affect the
Company's business and operations. See "Item 1. Business - Competition,  Markets
and Regulation".

      Risks of International Operations. At December 31, 1997, approximately 20%
of the Company's  proved reserves of oil and gas were located outside the United
States (12% in Argentina  and 8% in Canada).  The success and  profitability  of
international  operations  may be adversely  affected by risks  associated  with
international  activities,  including  economic and labor conditions,  political
instability, tax laws (including U.S. taxes on foreign subsidiaries) and changes
in the value of the United States dollar versus the local  currency in which oil
and gas are sold.  To the extent that the  Company is involved in  international
activities,  changes  in  exchange  rates may  adversely  affect  the  Company's
consolidated revenues and expenses (as expressed in United States dollars).

      Estimates  of Reserves  and Future Net  Revenues.  Numerous  uncertainties
exist in  estimating  quantities  of proved  reserves  and future  net  revenues
therefrom.  The estimates of proved reserves and related future net revenues set
forth in this  Report are based on  various  assumptions,  which may  ultimately
prove to be inaccurate.  Therefore,  such  estimates  should not be construed as
estimates of the current market value of the Company's proved reserves.

Definition of Certain Oil and Gas Terms

      When used in this Report,  the following terms have the meanings indicated
below.

      "Bbl" means a standard barrel of 42  U.S. gallons and represents the basic
unit for  measuring  the  production  of crude  oil,  natural  gas  liquids  and
condensate.

                                       11





      "Bcf" means one billion cubic feet.

      "Bcfe" means a billion cubic feet equivalent and is a customary convention
used in the United States to express oil and gas volumes on a comparable  basis.
It is determined on the basis of the estimated relative energy content of oil to
natural gas, being approximately one barrel of oil per six Mcf of gas.

      "BOE" means a barrel-of-oil-equivalent  and is a customary convention used
in the United States to express oil and gas volumes on a comparable basis. It is
determined on the basis of the estimated  relative energy content of natural gas
to oil, being approximately six Mcf of natural gas per Bbl of oil.

      "Btu" means British  thermal unit and represents the amount of heat needed
to raise the temperature of one pound of water one degree Fahrenheit.

      "gross" acre or well means an acre or well in which a working  interest is
owned.

      "MBbl" means one thousand Bbls.

      "MBOE" means one thousand BOEs.

      "Mcf"  means one  thousand  cubic  feet  under  prescribed  conditions  of
pressure  and  temperature  and  represents  the basic  unit for  measuring  the
production of natural gas.

      "MMcf" means one million cubic feet.

      "net"  acres or wells is  determined  by  multiplying  the gross  acres or
wells,  as the case may be, by the  applicable  working  interest in those gross
acres or wells.

      "NGLs" means natural gas liquids.

      "NYMEX" means The New York Mercantile Exchange.

      "proved  reserves"  means  those  estimated  quantities  of crude  oil and
natural gas that geological and  engineering  data  demonstrate  with reasonable
certainty to be  recoverable  in future years from known oil and gas  reservoirs
under existing economic and operating conditions. Proved reserves are limited to
those  quantities  of oil  and  gas  that  can  be  expected  to be  recoverable
commercially at current prices and costs,  under existing  regulatory  practices
and with existing conventional equipment and operating methods.

      "SEC 10 value" means the present  value of estimated  future net revenues,
before income taxes, of proved reserves,  determined in all material respects in
accordance  with the rules and  regulations of the U.S.  Securities and Exchange
Commission  ("SEC") (generally using prices and costs in effect at the specified
date and a 10% discount  rate).  The reserve  estimates  for 1997 utilize an oil
price of $16.89 per Bbl  (reflecting  adjustments  for oil quality and gathering
and  transportation  costs),  an NGL price of $12.79  per Bbl and a gas price of
$2.06  per  Mcf  (reflecting   adjustments   for  BTU  content,   gathering  and
transportation costs and gas processing and shrinkage).

ITEM 2.     PROPERTIES

      The information included in this Report about the Company's proved oil and
gas reserves at December 31, 1997,  including  estimated  quantities  and SEC 10
value, is based on reserve reports  prepared by the Company's  engineers for all
properties  other than Canada,  which have been  prepared by Martin  Petroleum &
Associates and Gilbert Laustsen Jung Associates.

      Numerous  uncertainties exist in estimating  quantities of proved reserves
and  in  projecting  future  rates  of  production  and  timing  of  development
expenditures,  including many factors beyond the Company's control.  This Report
contains  estimates of the Company's proved oil and gas reserves and the related
future net revenues,  which are based on various  assumptions,  including  those
prescribed by the SEC.  Actual future production, oil and gas prices,  revenues,

                                       12





taxes, capital expenditures, operating expenses, geologic success and quantities
of recoverable oil and gas reserves may vary substantially from those assumed in
the estimates and could materially  affect the estimated  quantities and related
SEC 10 value of proved  reserves  set forth in this  Report.  In  addition,  the
Company's  reserves  may be subject to  downward  or upward  revisions  based on
production  performance,  purchases  or sales of  properties,  results of future
development,  prevailing  oil and  gas  prices  and  other  factors.  Therefore,
estimates of the SEC 10 value of proved reserves contained in this Report should
not be  construed as  estimates  of the current  market  value of the  Company's
proved reserves.

      SEC 10 value is a reporting  convention  that  provides a common basis for
comparing oil and gas companies subject to the rules and regulations of the SEC.
It  requires  the  use of oil  and  gas  prices  prevailing  as of the  date  of
computation.  Consequently, it may not reflect the prices ordinarily received or
that will be received for oil and gas because of seasonal price  fluctuations or
other  varying  market  conditions.  SEC  10  values  as of  any  date  are  not
necessarily indicative of future results of operations.  Accordingly,  estimates
of future net revenues in this Report may be materially  different  from the net
revenues that are ultimately received.

      The Company did not provide estimates of total proved oil and gas reserves
during 1997 to any federal authority or agency, other than the SEC.

Proved Reserves

      The Company's  proved  reserves  totaled 761.6 million BOE at December 31,
1997,  302.2  million BOE at December 31, 1996 and 296.8 million BOE at December
31,  1995,   representing   $3.1   billion,   $2.3  billion  and  $1.4  billion,
respectively,  in SEC 10 value.  The Company  achieved these annual increases in
reserves  despite having sold reserves of 18.1 million BOE in 1997, 45.8 million
BOE in 1996 and 34.8 million BOE in 1995.

      On a BOE basis, 86% of the Company's total proved reserves at December 31,
1997 are proved developed reserves.  Based on reserve information as of December
31, 1997 and using the Company's reserve report production information for 1998,
the reserve-to-production ratio associated with the Company's proved reserves is
11.3 years on a BOE basis.  The following table provides  information  regarding
the Company's  proved  reserves by geographic  area as of and for the year ended
December 31, 1997.

                           PROVED OIL AND GAS RESERVES
1997 Average Proved Reserves as of December 31, 1997 Daily Production (a) ------------------------------------------ --------------------------- Oil Natural SEC 10 Oil Natural & NGLs Gas Value & NGLs Gas (MBbls) (MMcf) MBOE (000) (Bbls) (Mcf) BOE ------- -------- ------- ---------- ------- -------- ------ United States: Gulf Coast Region.... 19,289 316,238 71,996 $ 412,296 5,919 110,657 24,362 MidContinent Region.. 102,331 1,101,421 285,901 1,153,385 9,828 101,860 26,805 Permian Basin........ 207,696 301,471 257,941 931,345 32,847 74,792 45,312 -------- -------- ------- --------- ------- ------- ------- 329,316 1,719,130 615,838 2,497,026 48,594 287,309 96,479 Argentina............. 31,612 340,392 88,344 345,721 406 - 406 Canada................ 22,796 207,868 57,441 232,925 - - - -------- -------- ------- --------- ------- ------- ------- Total............... 383,724 2,267,390 761,623 $ 3,075,672 49,000 287,309 96,885 ======== ========= ======= ========== ======= ======= =======
- --------------- (a) The 1997 average daily production is calculated using a 365-day year and without making pro forma adjustments for any acquisitions, divestitures or drilling activity that occurred during the year. Reserve Replacement For the ninth consecutive year, the Company was able to replace its annual production volumes with proved reserves of crude oil, NGLs and natural gas, stated on an energy equivalent basis. During 1997, the Company added 512.9 million BOE resulting in reserve replacement of 1450% of total production. Of the 512.9 million BOE reserve additions, 457.7 million BOE were added through acquisitions of proved properties, 2.4 million BOE were added through 13 exploration and development drilling activities and 52.8 million BOE were the net result of revisions. Reserves added by development drilling are primarily from the identification of additional infill drilling locations and new secondary recovery projects. Reserve revisions result from several factors including changes in existing estimates of quantities available for production and changes in estimates of quantities which are economical to produce under current pricing conditions. The Company's reserves as of December 31, 1997 were estimated using a price of $16.89 per Bbl of oil, $12.79 per Bbl of NGLs and $2.06 per Mcf of gas. Should prices decline in future periods, reserves may be revised downward for quantities which may be uneconomical to produce at lower prices. The Company's 1997 reserve replacement rate on a BOE basis was 1450%, which included reserve replacement rates for oil and natural gas of 1375% and 1528%, respectively. Previous reserve replacement performance rates were 314% in 1996 (398% for oil and 239% for gas) and 281% in 1995 (263% for oil and 297% for gas). For the three year period ended December 31, 1997, the average reserve replacement rate was 769%, as compared to a three year average replacement rate of 377% in 1996 and 412% in 1995. During 1997, the Company's reserve replacement rate was primarily the product of its acquisition activities. In 1995, and to a greater extent in 1996, the reserve replacement rates were influenced more by exploration and development activities and less by acquisition activities. Finding Cost The Company's acquisition and finding cost for 1997 was $8.23 per BOE as compared to the 1996 and 1995 acquisition and finding costs of $3.10 and $2.87 per BOE, respectively. The increased rate in 1997 is a result of the fair value associated with Mesa's and Chauvco's long-lived, low production cost reserves. The average acquisition and finding cost for the three-year period from 1995 to 1997 was $7.04 per BOE representing a 76% increase from the 1996 three-year average rate of $3.99. Oil and Gas Mix The Company seeks to maintain a strategic balance between oil and natural gas reserves and production. While the Company's reserve and production mix may vary somewhat on a short-term basis as the Company takes advantage of market conditions and specific acquisition and development opportunities, management believes that a relative mix of approximately 50% oil and NGLs and 50% natural gas is in the best long-term interests of the Company and its stockholders. The Company's reserve mix was 50% oil and NGLs and 50% gas at December 31, 1997, and its production mix was 51% oil and NGLs and 49% gas during 1997. Description of Properties The Company manages its domestic oil and gas properties based upon their geographic area, and, as a result, the Company has divided its domestic operations into three domestic operating regions: the Permian Basin region, the onshore and offshore Gulf Coast region and the MidContinent region. In addition, at December 31, 1997, the Company has international operations principally in Argentina and Canada. Gulf Coast. The Gulf Coast region includes onshore oil and gas properties located in South and East Texas, Louisiana and Mississippi and offshore properties in the Gulf of Mexico. In the Gulf Coast region, the Company is focused on reserve and production growth through a balanced portfolio of development and exploration activities. To accomplish this, the Company has devoted most of its domestic exploration efforts to this region as well as its investment in and utilization of 3-D seismic technology. Utilization of 3-D seismic technology during 1997 yielded substantial results in the Company's Lopeno field which produces from the Wilcox formation. Gross gas production from this area increased from 36 MMcf per day to 57 MMcf per day during 1997 as a result of drilling eight development wells, most of which were identified from 3-D seismic data. The Company has identified at least eight additional drilling locations after further interpretation of the 3-D data. In addition, the Company continues to experience successful results in its 100% owned Pawnee field which produces 21 MMcf per day from 23 wells in the Edwards formation. The Company has been actively developing this field with new drilling, horizontal recompletions, adding new perforations and acidizing existing wellbores which increased field production seven MMcf per day during 1997. A 3-D seismic survey will be utilized to identify additional drilling locations in this field area. 14 Cotton Valley. In May of 1997, the Company acquired a 35% interest in approximately 375,000 acres within the Cotton Valley Pinnacle Reef Trend from Union Pacific Resources Company ("UPRC") for $26.9 million. The Company and UPRC have signed an exploration agreement to jointly explore and develop this area located in eastern Texas. On December 19, 1997, the Company completed the acquisition of assets in the East Texas Basin from affiliates of American Cometra, Inc. ("ACI") and Rockland Pipe Co. ("Rockland"), both subsidiaries of Electrafina S.A. of Belgium. Purchase consideration consisted of $85 million cash and 1.6 million shares of Company common stock. The Company acquired all of ACI's producing wells, acreage (95,000 gross and 38,000 net), seismic data, royalties and mineral interests and Rockland's gathering system, pipeline and Plum Creek gas processing plant in the East Texas Basin. The acquired acreage is in Henderson, Freestone, Anderson and Leon counties. The acquired wells are currently producing approximately 18 MMcf of gas per day and have significant upside potential with the planned drilling of additional wells. During 1998, the Company plans an aggressive drilling program in the Gulf Coast region with a total budget of $157.5 million to drill approximately 49 exploratory wells and 25 development wells. Exploration expenditures are estimated at $75 million and will be focused in the inland water transition zone areas of Louisiana and Texas and the Cotton Valley Pinnacle Reef Trend in East Texas. During 1998, the Company will focus development activities in five core properties: Lopeno and Pawnee fields in South Texas, Timbalier Bay and Grand Bay fields in South Louisiana and Eugene Island 208 field in the Gulf of Mexico. MidContinent. The MidContinent region includes properties located in the Texas Panhandle, Oklahoma, Arkansas and Kansas. By far, the largest of these assets is the Company's Hugoton field followed by the West Panhandle field, both acquired from Mesa in August 1997. These two fields combined account for approximately $1 billion of the Company's $3.1 billion of SEC 10 reserve value at December 31, 1997. During 1998, the Company plans to spend approximately $48.8 million in the MidContinent region. This activity includes drilling approximately 110 development wells and six exploratory wells and performing recompletions on approximately 26 targeted wells. Hugoton Field. The Hugoton field in southwest Kansas is one of the largest producing gas fields in the continental United States. The Company's Hugoton properties represent approximately 13% of the proved reserves in the field and are located on over 237,000 net acres, covering approximately 400 square miles. The Company has working interest in approximately 1,200 wells in the Hugoton field, 977 of which it operates, and royalty interest in approximately 750 wells. The Company owns substantially all of the gathering and processing facilities, primarily the Satanta plant, that service its production from the Hugoton field. Such ownership allows the Company to control the production, gathering, processing and sale of its gas and associated NGLs. Production in the Hugoton field is subject to allowables set by state regulators, but the Company's Hugoton properties are capable of producing approximately 188 MMcf of wet gas per day (i.e., gas production at the wellhead before processing and before reduction for royalties). The Company estimates that it and other major producers in the Hugoton field produced at or near capacity in 1997. By continuing its successful installation of compression and artificial lift, in combination with an extensive stimulation program and a selective replacement well drilling program, the Company anticipates that the normal 8% Hugoton properties production decline may be temporarily arrested. The Company intends to submit an application to the Kansas Corporation Commission (the "KCC") to allow infill drilling into the Council Grove Formation. The Company believes that such infill drilling could increase production from its Hugoton properties. There can be no assurance that the application will be approved or as to the timing of receipt of such approval if such approval is obtained. West Panhandle Field. The West Panhandle properties are located in the panhandle region of Texas where initial production commenced in 1918. These stable, long-lived reserves are attributable to the Red Cave, Brown Dolomite, Granite Wash and fractured Granite formations at depths no greater than 3,500 feet. The Company's natural gas in the West Panhandle field is produced from approximately 600 wells on more than 241,000 gross (185,000 net) acres covering over 375 square miles. The Company's wellhead gas produced from the West Panhandle field contains a high quantity of NGLs, yielding relatively greater NGL volumes than realized from other natural gas fields. The Company operates the wells and production equipment and Colorado Interstate Gas Company owns and operates the gathering system. 15 The production from the West Panhandle field is processed through the Company-owned Fain natural gas processing plant. In February 1997, the Company initiated a project to add nitrogen rejection capabilities at the Fain Plant. This project, which is scheduled for completion in mid-1998, will allow the Company to recover in excess of 90% of the helium in the processed gas, increase NGL recoveries and upgrade residue quality to improve marketing flexibility. As of December 31, 1997, the Company's West Panhandle properties represented approximately 12% of the Company's equivalent proved reserves and approximately 12% of the present value of estimated future net cash flows, determined in accordance with SEC guidelines. The Company has identified over 50 locations that have additional production potential in new areas or deeper zones that the Company plans to redrill in 1998. Permian Basin. Of the $931.3 million of SEC 10 value contained in the properties in the Permian Basin region, the Spraberry field accounts for $642.6 million. The Spraberry field was discovered in 1949 and encompasses eight counties in West Texas. The field is approximately 150 miles long and 75 miles wide at its widest point. The oil produced is West Texas Intermediate Sweet, and the gas produced is casinghead gas with an average Btu content of 1,400 Btu per Mcf. The oil and gas is produced from three formations, the upper and lower Spraberry and the Dean, at depths ranging from 6,700 feet to 9,200 feet. The center of the Spraberry field was unitized in the late 1950's and early 1960's by the major oil companies but until the late 1980's experienced very limited development activity. Since 1989, the Company has focused acquisition and development drilling activities in the unitized portion of the Spraberry field due to the dormant condition of the properties and the high net revenue interests available. The Company believes the area offers excellent opportunities to enhance oil and gas reserves because of the hundreds of undeveloped infill drilling locations and the ability to reduce operating expenses through economies of scale. In February 1997, the Texas Railroad Commission (which regulates oil and gas production) entered a favorable order on the Company's application to allow administrative approval of uncontested applications to increase the density of drilling in the Spraberry field from one well per 80 acres to one well in 40 acres. The Company believes such reduced spacing may provide in excess of 1,000 additional drilling locations which have the potential to add 70 million BOE's to the Company's reserve base. Through December 31, 1997, the Company has drilled 60 wells in the Spraberry field under the reduced spacing requirements resulting in the addition of approximately 6.9 million BOE's to its reserve portfolio. Since the early 1960's, the Company has been involved in acquisition and development activities in other fields in the Permian region which includes all of West Texas and Southeastern New Mexico. The Iatan field in Mitchell County, Texas, the Lusk and Dagger Draw fields in Eddy County, New Mexico, the Abell (Devonian) field in Crane and Pecos Counties of Texas, the Ozona field in Crockett and Sutton Counties of Texas and the War-Wink West Field in the Delaware Basin of West Texas are core areas for the Company's Permian region operations in terms of existing production, production and reserve growth, and identification of additional drilling locations. The Company will continue to focus on the development of the existing properties utilizing waterflood procedures and secondary recovery technologies as these efforts have consistently resulted in increased production, reserve additions due to development drilling, and new drilling locations. In addition, all of the fields in this operational group have been screened for feasibility for carbon dioxide (CO2) flood implementation, and the Company plans to move forward in utilizing this technology in 1998. In total, the Company anticipates spending $112.5 million in 1998 in the Permian Basin to drill approximately 295 wells and to perform recompletions on approximately 135 targeted wells. Development activities will account for 95% of these planned expenditures. International. The acquisition of Chauvco provided the Company with a significant presence in Argentina and Canada, representing 11% and 8% of the Company's SEC 10 value at December 31, 1997. The Canadian producing properties are primarily located in Alberta and British Columbia, Canada in the following areas: Thompson/Alliance, Spirit River/Rycroft, Cherhill, Killam, Choice, David, Martin Creek and Chinchaga. During 1997, these properties produced an average of 17,532 BOE's per day, net to the Company's interest. These properties currently include more than 700 development drilling locations. The Company's Argentine properties are primarily located in the Tierra del Fuego and Neuquen basins. Chauvco's share of Argentine production during 1997 averaged 16,147 BOE's per day. The Tierra del Fuego production concession is located in the extreme southern portion of Argentina, approximately 1,500 miles south of the country's capital, Buenos Aires. Crude oil, natural gas, condensate and NGLs are produced from six separate fields in which the Company has a 35% 16 working interest. The most significant area is the San Sebastian field which accounts for approximately 40% of crude oil and condensate production, 100% of propane and butane production, and 84% of natural gas sales from the concession. In Argentina, recent expansion of gas processing facilities and completed pipeline connections at Tierra del Fuego will allow handling of increased production volumes committed for delivery under a gas contract to a petrochemical plant in Chile. Natural gas deliveries under the contract to the methanol plant in Chile commenced in January 1997 at a rate of 17.0 MMcf per day. The Company's operated production in Argentina is concentrated in the Neuquen Basin which is located about 925 miles southwest of the country's capital city and just to the east of the Andes Mountains. Crude oil and natural gas are produced from two separate fields in the Loma Negra/NI Block, the Huincul field in the Dadin Block and from three oil fields and one natural gas field in the Al Norte de la Dorsal Block in which the Company has a 100% working interest. In addition to the proved producing assets of Chauvco, the Company acquired a substantial inventory of unproved oil and gas properties which will provide the Company with many exploration opportunities with the potential for significant reserve additions. Although the acquisition of a portfolio of unproved properties represents an exciting challenge to the Company's team of engineers, geologists and geophysicists, such opportunities are not without risk. U.S. GAAP requires periodic evaluation of these costs on a project-by-project basis in comparison to their estimated value. These evaluations will be affected by results of exploration activities, future sales or expiration of all or a portion of such projects. If the quantity of proved reserves determined by such evaluations are not sufficient to fully recover the cost invested in each project, the Company may be required to recognize significant noncash charges to the earnings of future periods. There can be no assurance that economic reserves will be determined to exist for such projects. On a smaller scale, the Company has recently entered into agreements to begin exploratory activity in the African nations of South Africa and Gabon. The South African Block covers over five million acres along the southern coast of South Africa, generally in water depths less than 650 feet. It is located between Block 9, which produces quantities of oil from Oribi Field (up to 25,000 barrels per day) and gas from F-A Field (about 190 MMcf per day), and Pioneer's study block 13A/14A offshore Port Elizabeth. In addition, Pioneer concluded in November of 1997, a Technical Cooperation Agreement on Block 7 which is located adjacent to and west of Block 9, and covers an area of about three million acres, the most prospective portion of which is in water depths of less than 500 feet. The Company plans to spend approximately $181.2 million internationally in 1998 as follows: $97.5 million in Argentina, $57.5 million in Canada, and $26.2 million in Africa and other international areas. The Company's international exploration budget of $50 million is primarily devoted to Africa, Argentina and Canada. Selected Oil and Gas Information The following tables set forth selected oil and gas information for the Company as of and for each of the years ended December 31, 1997, 1996 and 1995. Because of normal production declines, increased or decreased drilling activities and the effects of future acquisitions or divestitures, the historical information presented below should not be interpreted as indicative of future results. 17 Production, Price and Cost Data. The following table sets forth production, price and cost data with respect to the Company's properties for the years ended December 31, 1997, 1996 and 1995. PRODUCTION, PRICE AND COST DATA (a)
Year ended December 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------- ----------------------------- ----------------------------- Australia(b) United United and United States Argentina Total States Argentina Total States Australia Total -------- --------- -------- ------- ---------- -------- -------- --------- -------- Production information: Annual production: Oil (MBbls)..... 13,470 148 13,618 10,872 403 11,275 11,328 1,574 12,902 NGLs (MBbls)... 4,267 - 4,267 - - - - - - Gas (MMcf)...... 104,868 - 104,868 73,924 1,927 75,851 76,669 8,626 85,295 Total (MBOE).... 35,215 148 35,363 23,193 723 23,916 24,106 3,012 27,118 Average daily production: Oil (Bbls).... 36,903 406 37,309 29,705 1,100 30,805 31,036 4,312 35,348 NGLs (Bbls)... 11,691 - 11,691 - - - - - - Gas (Mcf)..... 287,309 - 287,309 201,979 5,265 207,244 210,052 23,633 233,685 Total (BOE)... 96,479 406 96,885 63,368 1,978 65,346 66,045 8,251 74,296 Average prices: Oil (per Bbl).... $ 18.50 $ 19.68 $ 18.51 $ 19.96 $ 19.81 $ 19.96 $ 16.70 $ 18.78 $ 16.96 NGLs (per Bbl)... $ 12.59 $ - $ 12.59 $ - $ - $ - $ - $ - $ - Gas (per Mcf).... $ 2.20 $ - $ 2.20 $ 2.27 $ 1.95 $ 2.27 $ 1.84 $ 1.88 $ 1.84 Revenue (per BOE) $ 15.16 $ 19.68 $ 15.18 $ 16.61 $ 16.21 $ 16.60 $ 13.69 $ 15.21 $ 13.85 Average costs: Production costs (per BOE): Lease operating expense....... $ 3.01 $ 5.47 $ 3.02 $ 3.39 $ 4.75 $ 3.43 $ 3.97 $ 4.12 $ 3.99 Production taxes. .81 .19 .81 .94 - .91 .70 - .62 Workover....... .25 - .25 .28 - .27 .25 - .22 ------- ------ ------- ------- ------ ------- ------- ----- ------- Total........ $ 4.07 $ 5.66 $ 4.08 $ 4.61 $ 4.75 $ 4.61 $ 4.92 $ 4.12 $ 4.83 Depletion expense (per BOE)...... $ 5.77 $ 8.70 $ 5.78 $ 4.25 $ 5.73 $ 4.30 $ 5.19 $ 6.74 $ 5.36 - ---------------
(a) These amounts are calculated without making pro forma adjustments for any acquisitions, divestitures or drilling activity that occurred during the respective years. (b) Represents production associated with the Company's Australian subsidiaries prior to their divestiture in 1996. 18 Productive Wells. The following table sets forth the number of productive oil and gas wells attributable to the Company's properties as of December 31, 1997, 1996 and 1995. PRODUCTIVE WELLS(a)
Gross Productive Wells Net Productive Wells ------------------------ ----------------------- Oil Gas Total Oil Gas Total ------ ------ ------ ------ ------ ------ Year ended December 31, 1997: United States.................. 6,075 3,931 10,006 3,399 2,326 5,725 Argentina...................... 213 53 266 154 38 192 Canada......................... 1,666 428 2,094 667 202 869 ------ ------ ------ ------ ------ ------ Total.......................... 7,954 4,412 12,366 4,220 2,566 6,786 ====== ====== ====== ====== ====== ====== Year ended December 31, 1996: United States.................. 5,572 1,393 6,965 3,119 650 3,769 Argentina...................... 5 - 5 1 - 1 ------ ------ ------ ------ ------ ------ Total.......................... 5,577 1,393 6,970 3,120 650 3,770 ====== ====== ====== ====== ====== ====== Year ended December 31, 1995: United States.................. 6,138 2,137 8,275 3,198 680 3,878 Australia and Other Foreign.... 112 450 562 27 54 81 ------ ------ ------ ------ ------ ------ Total.......................... 6,250 2,587 8,837 3,225 734 3,959 ====== ====== ====== ====== ====== ======
- --------------- (a) Productive wells consist of producing wells and wells capable of production, including shut-in wells. One or more completions in the same well bore are counted as one well. Any well in which one of the multiple completions is an oil completion is classified as an oil well. As of December 31, 1997, the Company owned interests in 182 wells containing multiple completions. Leasehold Acreage. The following table sets forth information about the Company's developed, undeveloped and royalty leasehold acreage as of December 31, 1997. LEASEHOLD ACREAGE
Developed Acreage Undeveloped Acreage ------------------------ ------------------------ Royalty Gross Acres Net Acres Gross Acres Net Acres Acreage ----------- ---------- ----------- ---------- -------- Year ended December 31, 1997: United States................. 1,665,292 989,027 1,472,049 591,005 420,907 Canada........................ 331,000 152,000 701,000 478,000 - Argentina..................... 697,683 301,820 1,650,769 1,027,490 - ----------- ---------- ----------- ---------- -------- Total......................... 2,693,975 1,442,847 3,823,818 2,096,495 420,907 =========== ========== =========== ========== ========
Drilling Activities. The following table sets forth the number of gross and net productive and dry wells in which the Company had an interest that were drilled and completed during the years ended December 31, 1997, 1996 and 1995. This information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled and the oil and gas reserves generated thereby or the costs to the Company of productive wells compared to the costs of dry wells. 19 DRILLING ACTIVITIES Gross Wells Net Wells Year Ended December 31, Year Ended December 31, ---------------------- ---------------------- 1997 1996(b) 1995 1997 1996(b) 1995 ----- ------ ----- ----- ------ ----- United States: Productive wells: Development................ 483 535 432 341.2 362.9 307.0 Exploratory................ 38 37 30 23.8 24.2 18.0 Dry holes: Development................ 18 7 7 8.8 4.4 2.1 Exploratory................ 46 10 16 30.3 6.0 4.7 ----- ----- ----- ----- ------ ----- 585 589 485 404.1 397.5 331.8 ----- ----- ----- ----- ------ ----- Australia and other foreign: Productive wells: Development................ - 2 6 - .3 1.4 Exploratory................ - - 1 - - .3 Dry holes: Development................ - 1 - - .2 - Exploratory................ 1 1 9 .4 .2 2.8 ----- ----- ----- ----- ------ ----- 1 4 16 .4 .7 4.5 ----- ----- ----- ----- ------ ----- Argentina: Productive wells: Development................ 4 3 - .6 .4 - Exploratory................ 1 - 1 .1 - .1 Dry holes: Development................ - - - - - - Exploratory................ 1 3 7 .1 .4 1.0 ----- ----- ----- ----- ------ ----- 6 6 8 .8 .8 1.1 ----- ----- ----- ----- ------ ----- Total.................... 592 599 509 405.3 399.0 337.4 ===== ===== ===== ===== ====== ===== Success ratio(a)............. 89% 96% 92% 90% 97% 97% - --------------- (a) Represents those wells that were successfully completed as productive wells. (b) The 1996 Australian amounts include only three months of activity related to the Company's Australian properties prior to their sale in March 1996. The following table sets forth information about the Company's wells that were in progress at December 31, 1997. Gross Wells Net Wells ----------- --------- United States: Development....................... 112 82.0 Exploratory....................... 13 9.1 ----- ------ 125 91.1 ----- ------ Canada: Development....................... 1 0.9 Exploratory....................... 1 0.6 ----- ------ 2 1.5 ----- ------ Argentina: Development....................... 5 5.0 Exploratory....................... 4 2.3 ----- ------ 9 7.3 ----- ------ Total.......................... 136 99.9 ===== ====== ITEM 3. LEGAL PROCEEDINGS The Company is party to various legal proceedings, which are described under "Legal Actions" in Note H of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data". The Company is also party to other litigation incidental to its business. The claims for damages from such other legal actions are not in excess of 10% of the Company's current assets and the Company believes none of these actions to be material. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Acquisition of Chauvco On December 18, 1997, the Company held a Special Meeting for stockholders in Dallas, Texas. The Special Meeting related to the acquisition by the Company of the Canadian and Argentine oil and gas businesses of Chauvco Resources Ltd., an Alberta corporation, and the spinoff to Chauvco shareholders and optionholders of Chauvco's Gabonese oil and gas operations and other international interests (the "Combination Agreement"). Also on December 18, 1997, Chauvco held a Special Meeting for its stockholders in Alberta, Canada in connection with the Combination Agreement. Each of the proposals was approved by stockholders as follows: The Company - ----------- Broker Proposal For Against Abstain Non-Votes -------- ---------- ------- ------- --------- Combination Agreement 57,282,078 345,596 285,770 - Chauvco - ------- Broker Proposal For Against Abstain Non-Votes -------- ---------- ------- ------- --------- Combination Agreement 43,788,841 1,226 - - 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange under the symbol "PXD". The following table sets forth, for the periods indicated, the high and low sales prices for the Company's common stock, as reported in the New York Stock Exchange composite transactions, and the amount of dividends paid. Dividends High Low Paid per share --------- -------- -------------- 1997 Fourth quarter..................... $43 13/16 $ 25 5/8 - Third quarter...................... $ 44 3/8 $ 34 3/4 $.05 Second quarter..................... $ 36 3/16 $ 28 1/2 - First quarter...................... $ 37 5/8 $ 28 7/8 $.05 1996 Fourth quarter..................... $ 37 1/4 $ 26 1/8 - Third quarter...................... $ 27 3/4 $ 22 1/4 $.05 Second quarter..................... $ 27 7/8 $ 22 3/4 - First quarter...................... $ 23 3/4 $ 19 3/8 $.05 On February 27, 1998, the last reported sales price of the Company's common stock, as reported in the New York Stock Exchange composite transactions, was $23.69 per share. As of February 27, 1998, the Company's common stock was held by approximately 55,000 holders of record, representing approximately 112,000 total owners. Since the third quarter of 1991, the Company has paid a cash dividend of $.05 per share of common stock in the first and third quarters of each calendar year. Subject to the continuation of successful operations and the discretion of the Company's Board of Directors, the Company intends to continue to declare a $.05 per share dividend on a semi-annual basis to achieve an annual dividend level of $.10 per share. The Company's Board of Directors may from time to time reconsider the dividend policy and make any changes that it deems appropriate. There can be no assurance that any future dividends or distributions will be paid on the Company's common stock. On December 19, 1997, the Company completed the purchase of certain assets in the East Texas Basin from affiliates of American Cometra, Inc. and Rockland Pipeline Co., both of which are subsidiaries of Electrafina S.A. of Belgium. The total consideration paid was approximately $130 million, consisting of $85 million in cash and 1.6 million shares of the Company's common stock. The common stock, which was issued in a private placement, was distributed to the following persons: Common Stock Common Stock Owned Prior to Acquired in Transaction Transaction -------------- ----------- Cometra Energy, L.P. 0 1,605,290 Terry N. McClure 0 9,800 James D. Paquin 0 19,600 Mark W. Young 1,000 19,600 In connection with such purchase of assets, the Company agreed to file and keep continuously effective for up to 24 months a registration statement covering the resale of the common stock issued in the transaction. Such registration statement was declared effective by the SEC on March 2, 1998. 22 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the Company should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements, related notes and other financial information included in "Item 8. Financial Statements and Supplementary Data".
Year ended December 31, ------------------------------------------------- 1997(a) 1996 1995 1994(b) 1993(c) --------- -------- -------- -------- -------- (in millions, except per share data) Statement of Operations Data: Revenues: Oil and gas.............................. $ 536.8 $ 396.9 $ 375.7 $ 337.6 $ 207.2 Natural gas processing................... - 23.8 33.2 39.2 77.5 Gas marketing............................ - - 76.8 103.0 43.8 Interest and other....................... 4.3 17.5 11.4 6.9 4.4 Gain on disposition of assets, net(d).... 4.9 97.1 16.6 9.5 23.2 -------- ------- ------- ------- ------- 546.0 535.3 513.7 496.2 356.1 -------- ------- ------- ------- ------- Costs and expenses: Oil and gas production................... 144.2 110.3 130.9 127.1 78.3 Natural gas processing................... - 12.5 25.9 33.6 51.6 Gas marketing............................ - - 75.7 101.5 42.8 Depletion, depreciation and amortization. 212.4 112.1 159.1 145.4 80.4 Impairment of oil and gas properties and natural gas processing facilities...... 1,356.4 - 130.5 - - Exploration and abandonments............. 77.2 23.0 27.5 25.2 3.6 General and administrative............... 48.8 28.4 37.4 29.0 23.8 Interest................................. 77.5 46.2 65.4 50.6 23.3 Other.................................... 7.1 2.5 11.3 4.3 3.9 -------- ------- ------- ------- ------- 1,923.6 335.0 663.7 516.7 307.7 -------- ------- ------- ------- ------- Income (loss) before income taxes, extraordinary item and cumulative effect of accounting change..................... (1,377.6) 200.3 (150.0) (20.5) 48.4 Income tax benefit (provision)............. 500.3 (60.1) 45.9 6.5 (17.0) -------- ------- ------- ------- ------- Income (loss) before extraordinary item and cumulative effect of accounting change... (877.3) 140.2 (104.1) (14.0) 31.4 Extraordinary item......................... (13.4) - 4.3 (.6) - Cumulative effect of accounting change..... - - - - 17.1 -------- ------- ------- ------- ------- Net income (loss)............................ $ (890.7) $ 140.2 $ (99.8) $ (14.6) $ 48.5 ======== ======= ======= ======= ======= Income (loss) before extraordinary item and cumulative effect of accounting change per share: Basic.................................. $ (16.88) $ 3.95 $ (2.96) $ (.47) $ 1.15 ======== ======= ======= ======= ======= Diluted................................ $ (16.88) $ 3.47 $ (2.96) $ (.47) $ 1.12 ======== ======= ======= ======= ======= Net income (loss) per share: Basic.................................... $ (17.14) $ 3.95 $ (2.84) $ (.49) $ 1.77 ======== ======= ======= ======= ======= Diluted.................................. $ (17.14) $ 3.47 $ (2.84) $ (.49) $ 1.73 ======== ======= ======= ======= ======= Dividends per share ....................... $ .10 $ .10 $ .10 $ .10 $ .10 ======== ======= ======= ======= ======= Weighted average shares outstanding........ 52.0 35.5 35.1 29.9 27.4 Other Financial Data: Cash flows from operating activities....... $ 228.2 $ 230.1 $ 156.6 $ 129.8 $ 112.2 Cash flows from investing activities....... (341.2) 13.7 (52.6) (446.0) (398.2) Cash flows from financing activities....... 166.0 (245.4) (107.9) 331.4 278.9 Balance Sheet Data: Working capital............................ $ 46.6 $ 26.1 $ 31.5 $ 43.7 $ 39.5 Property, plant and equipment, net......... 3,515.8 1,040.4 1,121.7 1,349.9 802.0 Total assets............................... 3,946.6 1,199.9 1,319.2 1,604.9 1,016.9 Long-term obligations...................... 2,124.0 329.0 603.2 727.2 544.3 Preferred stock of subsidiary.............. - 188.8 188.8 188.8 - Total stockholders' equity................. 1,548.8 530.3 411.0 509.6 348.8
- --------------- 23 (a) Includes amounts relating to the acquisition of Mesa beginning in August 1997. (b) Includes amounts relating to the acquisition of Bridge Oil Limited in July 1994 and the acquisition of properties from PG&E Resources Company in August 1994. (c) Includes amounts relating to the acquisition of certain Prudential-Bache Energy limited partnerships in July 1993. Also includes results of operations related to the Company's interest in the Carthage gas processing plant that had been deferred in 1992 and 1993 and the gain of $7.3 million recognized on the sale of that interest on June 30, 1993. (d) Includes a gain of $83.3 million in 1996 related to the disposition of certain wholly-owned subsidiaries. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Formation of Pioneer Pioneer Natural Resources Company (the "Company"), a Delaware corporation, was formed by the merger of Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa") on August 7, 1997. The Company was significantly expanded by the subsequent acquisition of the Canadian and Argentine oil and gas business of Chauvco Resources Ltd. ("Chauvco"), a publicly traded independent oil and gas company based in Calgary, Canada on December 18, 1997. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located principally in the MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the United States and in Argentina and Canada. Combining the physical assets and management teams of Parker & Parsley and Mesa into the Company created a company with a solid foundation of core assets. This foundation includes three core areas (the Hugoton gas field located in Southwest Kansas, the West Panhandle gas field located in the Texas Panhandle, and the Spraberry oil and gas field in West Texas) that provide consistent and dependable production, cash flow and ongoing development opportunities; a reserve portfolio which is balanced between oil and natural gas liquids and gas; a portfolio of exciting exploration opportunities; and a team of dedicated employees representing the professional disciplines and sciences which will allow the Company to continue to provide its shareholders with superior long-term value. The Company's first significant accomplishment after the merger was the acquisition of Chauvco. The Chauvco acquisition provided the Company with 87.6 MMBOE and 57.4 MMBOE of proved reserves in Argentina and Canada, respectively, and a substantial inventory of unproved oil and gas properties which will provide the Company with many exploration opportunities with the potential for significant reserve additions. Although the acquisition of the portfolio of unproved properties from Chauvco represents an exciting challenge to the Company's team of engineers, geologists and geophysicists, such opportunities are not without risk. U.S. GAAP requires periodic evaluations of these costs on a project-by-project basis in comparison to their estimated value. These evaluations will be affected by results of exploration activities, future sales or expiration of all or a portion of such projects. If the quantity of proved reserves determined by such evaluations are not sufficient to fully recover the cost invested in each project, the Company may be required to recognize significant noncash charges to the earnings of future periods. There can be no assurance that economic reserves will be determined to exist for such projects. In accordance with the provisions of Accounting Principles Board No. 16, "Business Combinations", both the merger with Mesa and the acquisition of Chauvco have been accounted for as purchases by the Company (formerly Parker & Parsley). As a result, the historical financial statements for the Company are those of Parker & Parsley, and the Company's financial statements present the addition of Mesa's and Chauvco's assets and liabilities as an acquisition by the Company in August and December 1997, respectively. Specifically, the accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows include the financial results of Mesa beginning in August 1997. The aggregate purchase consideration related to the assets and liabilities of Mesa and Chauvco, including transaction costs, was $991.0 million and $696.4 million, respectively. Financial Performance The Company reported a net loss of $890.7 million ($17.14 per share) as compared to net income of $140.2 million ($3.95 per share) for the years ended December 31, 1997 and 1996, respectively. The 1997 loss is primarily generated by a noncash charge of $1.4 billion ($863 million after-tax) in December of 1997, resulting from an impairment charge taken in accordance with the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). In addition to the above, the process of organizationally, operationally and financially combining Parker & Parsley and Mesa to create the Company resulted in the following pre-tax charges: the redemption of two issuances of senior notes at a loss of $18.3 million; $6.4 million of relocation expenses and $1.9 million of severance expenses; and a $2.3 million write-off of commitment fees related to Parker & Parsley's credit facility that was replaced with a new $1.4 billion credit agreement for the Company during 1997. As discussed more fully in "Results of Operations" below, the Company's financial performance during 1997 has been positively affected by increases in oil and gas production and 25 decreases in production costs per BOE due to ongoing cost reduction efforts, offset by decreases in commodity prices, increases in exploration and general and administrative expenses and an increase in interest expense due to the additional debt assumed from Mesa. The year ended December 31, 1996 includes $67.3 million ($1.90 per share) related to net after-tax gains on asset dispositions primarily due to the sale of the Company's Australasian subsidiaries. Net cash provided by operating activities of $228.2 million for the year ended December 31, 1997 was comparable to $230.1 million for the year ended December 31, 1996. The additional cash flow generated by increased production was offset by increased general and administrative expenses and interest expense and the payment of certain liabilities assumed from Mesa. Long-term debt has increased to $2.0 billion at December 31, 1997 from $320.9 million at December 31, 1996 due principally to the assumption of the outstanding debt of Mesa and Chauvco and the property acquisitions described below. The Company strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility for future opportunities. The Company's total book capitalization at December 31, 1997 was $3.5 billion, consisting of total long-term debt of $2.0 billion and stockholders' equity of $1.5 billion. Consequently, the Company's long-term debt to total capitalization increased to 56% at December 31, 1997 from 31% at December 31, 1996. 1998 Outlook During 1998, the Company plans to accelerate its portfolio management initiatives through a major divestiture program focused on improving operating efficiency and profitability. Approximately 95% of the Company's domestic fields generate only 15% of the Company's total cash flow. The Company plans to sell these nonstrategic fields for estimated proceeds of $375 to $550 million during the latter part of 1998. The proceeds will be used to reduce the Company's outstanding indebtedness and to fund the Company's capital expenditures program. This will leave the Company with approximately 25 fields, which represent its core producing assets and complementary development and exploration opportunities. The consummation of the Company's 1998 divestiture plans is entirely dependent on finding one or more willing buyers who have the financial wherewithal to complete such a purchase. Until such a buyer is found, the Company may reevaluate its portfolio of properties and at any time may adjust its plans concerning divestitures. As a result, there can be no assurance that the divestiture of any or all of these properties will be completed or that the estimated proceeds will be realized. Coincidentally with the property divestiture program, the Company has announced its intentions to reorganize its operations to take advantage of the economies of scale provided by the concentration of reserves in a small number of fields. The Company will combine the six domestic regions created by the merger between Parker & Parsley and Mesa into three geographic regions: the Permian Basin region, the MidContinent region and the onshore and offshore Gulf Coast region. The Company anticipates that it will incur nonrecurring expenditures of approximately $20 million during 1998 as a result of this reorganization. During 1998, the Company will continue its emphasis on core development, exploration and production activities, with a primary focus on the exploitation of its current portfolio of drilling locations. This portfolio was significantly enhanced and expanded by the major acquisitions completed in 1997. In addition, the 1996 and 1997 drilling programs have added a large number of new locations to which proved reserves have been assigned. The Company believes that its current portfolio of undeveloped prospects provides attractive development and exploration opportunities for at least the next three to five years. The Company expects to invest $500 million in capital projects during 1998. Of the total 1998 capital expenditure budget of $500 million, the Company has allocated $301 million to exploitation activities, $125 million to exploration activities and $74 million to oil and gas property acquisitions. The Company anticipates that the $426 million exploration and development budget will be spent geographically as follows: $106 million in the Permian Basin, $142 million in the onshore and offshore Gulf Coast, $47 million in the MidContinent, $26 million in Canada, $79 million in Argentina and $26 million in Africa and other international areas. This capital expenditure budget reflects the Company's plan to drill approximately 695 oil and gas wells. The Company currently expects to fund its 1998 capital expenditure budget primarily with internally-generated cash flow and the proceeds from the 1998 oil and gas property divestiture program. 26 This budget reflects the Company's ongoing strategy to commit a greater portion of its cash flow to higher growth potential projects, including significant 3-D seismic projects. Historically, Mesa and Parker & Parsley had each spent a small percentage of its respective capital on exploration projects. The Company now expects to spend approximately 29% of its exploration/exploitation capital budget on exploration. During most of 1996 and 1997, the Company benefitted from higher oil prices as compared to previous years. However, during the fourth quarter of 1997, oil prices began a downward trend that has continued into March 1998. A continuation of the oil price environment experienced during the first quarter of 1998 will have an adverse effect on the Company's revenues and operating cash flow, and may result in a downward adjustment to the Company's current 1998 capital budget of $500 million. Also, a continuing decline in oil prices could result in additional decreases in the carrying value of the Company's oil and gas properties. The forward looking statements in these projections, including statements relating to capital budget, production, cash flows and drilling activities, are based upon a number of assumptions, including among others, limited changes in oil and gas prices and the accuracy of reserve engineering studies. These assumptions may prove not to have been accurate. Significant Activities in 1997 Property Acquisition Activities Cotton Valley. In May of 1997, the Company acquired a 35% interest in approximately 375,000 gross acres within the Cotton Valley Pinnacle Reef Trend from Union Pacific Resources Company ("UPRC") for $26.9 million. The Company and UPRC have signed an exploration agreement to jointly explore and develop this area located in eastern Texas and plan to begin drilling the first exploration well before the end of the year. On December 19, 1997, the Company completed the acquisition of assets in the East Texas Basin from American Cometra, Inc. ("ACI") and Rockland Pipe Co. ("Rockland"), both subsidiaries of Electrafina S.A. of Belgium. The total consideration paid was approximately $130 million, consisting of $85 million in cash and 1.6 million shares of the Company's common stock. The Company acquired all of ACI's producing wells, acreage (95,000 gross and 38,000 net), seismic data, royalties and mineral interests and Rockland's gathering system, pipeline and Plum Creek gas processing plant in the East Texas Basin. The acquired acreage is in Henderson, Freestone, Anderson and Leon counties. The acquired wells are currently producing approximately 18 MMcf per day and have significant future drilling opportunities. Maude Traylor. In February of 1997, the Company completed the acquisition of a majority interest in the Maude Traylor field in Calhoun County, Texas for approximately $8.8 million. This acquisition represented an average working interest of 87% in approximately 1,840 acres and five wells which produce from the upper and lower Frio formations. Guatemala. During May of 1997, the Company finalized negotiations with Triton Energy for a 40% working interest in a joint exploration program of two blocks in Guatemala's South Peten Basin. Drilling on the Piedras Blancas #1 resulted in an unsuccessful exploratory well at a total cost to the Company of $5.4 million. Exploration and Development Activities Drilling Activities. Excluding the merger with Mesa and the acquisition of Chauvco, the Company's 1997 capital expenditures totaled $544 million reflecting expenditures of $247 million for exploitation activities, $96 million for exploration activities and $201 million for oil and gas property acquisitions in the Company's core areas. During 1997, the Company participated in the completion of 592 gross exploration and development wells, 453 wells in the Permian region, 56 wells in the Gulf Coast region, 76 wells in the MidContinent region, six wells in Argentina and one well in Guatemala. Of these wells, 85 were in progress at December 31, 1996. Of the total wells completed during the year ended December 31, 1997, 526 wells were completed successfully which resulted in an 89% success rate. In addition to the wells completed during 1997, the Company had 136 wells in progress at December 31, 1997. 27 Proved Reserves. The Company's proved reserves totaled 761.6 million BOE at December 31, 1997, 302.2 million BOE at December 31, 1996 and 296.8 million BOE at December 31, 1995. The Company achieved these annual increases in reserves despite having sold reserves of 18.1 million BOE in 1997, 45.8 million BOE in 1996 and 34.8 million BOE in 1995. Oil and NGL reserves at year-end 1997 were 383.7 million Bbls compared to 163.9 million Bbls at year-end 1996 and 147.3 million Bbls at year-end 1995 (a 134% increase from 1996 to 1997 and an 11% increase from 1995 to 1996). Natural gas reserves at year-end 1997 were 2,267.4 Bcf, compared to 829.4 Bcf at year-end 1996 and 896.9 Bcf at year-end 1995 (a 173% increase from 1996 to 1997 and an 8% decrease from 1995 to 1996). Reserve Replacement. For the ninth consecutive year, the Company was able to replace its annual production volumes with proved reserves of crude oil and natural gas, stated on an energy equivalent basis. During 1997, the Company added 512.9 million BOE resulting in reserve replacement of 1450% of total production. Of the 512.9 million BOE reserve additions, 457.7 million BOE were added through acquisitions of proved properties, 2.4 million BOE were added through exploration and development drilling activities and 52.8 million BOE were the net result of revisions. Reserves added by development drilling are primarily from the identification of additional infill drilling locations and new secondary recovery projects. Reserve revisions result from several factors including changes in existing estimates of quantities available for production and changes in estimates of quantities which are economical to produce under current pricing conditions. The Company's reserves as of December 31, 1997 were estimated using a price of $16.89 per Bbl for oil, $12.79 per Bbl of NGLs and $2.06 per Mcf of gas. Should prices decline in future periods, reserves may be revised downward for quantities which may be uneconomical to produce at lower prices. The Company's 1997 reserve replacement rate on a BOE basis was 1450%, which included reserve replacement rates for oil and natural gas of 1375% and 1528%, respectively. Previous reserve replacement performance rates were 314% in 1996 (398% for oil and 239% for gas) and 281% in 1995 (263% for oil and 297% for gas). For the three and five year periods ended December 31, 1997, the three and five year average reserve replacement rates were 769% and 685%, respectively. Finding Cost. The Company's acquisition and finding cost for 1997 was $8.23 per BOE as compared to the 1996 and 1995 acquisition and finding costs of $3.10 and $2.87 per BOE, respectively. The increased rate in 1998 is a result of the fair value assigned to Mesa's long-lived, low cost reserves. The average acquisition and finding cost for the three-year period from 1995 to 1997 was $7.04 per BOE representing a 76% increase from the 1996 three-year average rate of $3.99. Unproved Properties. Although the acquisition of the portfolio of unproved properties from Chauvco represents an exciting challenge to the Company's team of engineers, geologists and geophysicists, such opportunities are not without risk. U.S. GAAP requires periodic evaluations of these costs on a project-by-project basis in comparison to their estimated value. These evaluations will be affected by results of exploration activities, future sales or expiration of all or a portion of such projects. If the quantities of proved reserves determined by such evaluations are not sufficient to fully recover the cost invested in each project, the Company may be required to recognize significant noncash charges to the earnings of future periods. There can be no assurance that economic reserves will be determined to exist for such projects. Other Events Asset Dispositions. From time to time, the Company disposes of nonstrategic assets in order to raise capital for other activities, reduce debt or eliminate costs associated with nonstrategic assets. For the year ended December 31, 1997, the Company's asset disposition activity primarily consisted of the sale of certain domestic assets, primarily oil and gas properties, for proceeds of $114.1 million, which resulted in a pre-tax net gain of $4.3 million, and the sale of the Company's subsidiary with an ownership interest in oil and gas properties in Turkey for proceeds of $1.6 million, which resulted in the recognition of a pre-tax gain of $706 thousand. During the year ended December 31, 1996, the Company sold certain wholly-owned Australasian subsidiaries for proceeds of $183.2 million resulting in a pre-tax gain of $83.3 million and certain nonstrategic domestic assets for proceeds of $58.4 million that resulted in the recognition of a pre-tax net gain of $13.8 million. The proceeds from the asset dispositions were initially used to reduce the Company's outstanding bank indebtedness and subsequently to provide funding for a portion of the Company's capital expenditures, including purchases of oil and gas properties in the Company's core areas. During 1998, the Company anticipates selling certain nonstrategic domestic oil and gas properties for approximately $375 to $550 million. 28 Conversion of Subsidiary Preferred Shares to Common Stock. On July 28, 1997, the Company exercised its right to require each holder of its 6-1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares ("Preferred Shares") to exchange all Preferred Shares for shares of common stock of the Company (see Note I of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data"). On July 28, 1997, the Company issued 6.7 million shares of common stock in exchange for the 3,776,400 Preferred Shares outstanding. As a result, the Company will no longer incur interest expense associated with the Preferred Shares of approximately $12 million per year. Information Systems for the Year 2000. The Company will be required to modify its information systems in order to accurately process data referencing the year 2000. Because of the importance of occurrence dates in the oil and gas industry, the consequences of not pursuing these modifications could be very significant to the Company's ability to manage and report operating activities. Currently, the Company plans to contract with third parties to perform the software programming changes necessary to correct any existing deficiencies. The Company currently believes the total cost to make the necessary software program modifications will be approximately $3 million. Such programming changes are anticipated to be completed and tested by March 1, 1999. Reporting Comprehensive Income. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") which establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Specifically, SFAS 130 requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. Comprehensive income consists of the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. Specifically, this includes net income and other comprehensive income, which is made up of certain changes in assets and liabilities that are not reported in a statement of operations but are included in the balances within a separate component of equity in a statement of financial position. Such changes include, but are not limited to, unrealized gains for marketable securities and future contracts, foreign currency translation adjustments and minimum pension liability adjustments. Segment Reporting. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which establishes standards for public business enterprises for reporting information about operating segments in annual financial statements and requires that such enterprises report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. The Company operates in the one product line - oil and gas production - in limited geographic areas. The geographic information and information about major customers is disclosed in the Company's annual financial statements. 29 Results of Operations Oil and Gas Production The following table describes the results of the Company's oil and gas production activities during 1997, 1996 and 1995. Year ended December 31, ------------------------------------ 1997 1996 1995 ----------- ---------- --------- (in thousands, except average price and cost data) Revenues: Oil and gas............................ $ 536,782 $ 396,931 $ 375,720 Gain on disposition of oil and gas properties, net (a)................. 3,304 7,786 16,847 ---------- --------- -------- 540,086 404,717 392,567 ---------- --------- -------- Costs and expenses: Oil and gas production................. 144,170 110,334 130,905 Depletion.............................. 204,450 102,803 145,468 Impairment of oil and gas properties... 1,356,390 - 129,745 Exploration and abandonments........... 37,603 12,653 16,431 Geological and geophysical............. 39,557 9,054 11,121 ---------- --------- -------- 1,782,170 234,844 433,670 ---------- --------- -------- Operating profit (loss) (excluding general and administrative expense and income taxes).................... $(1,242,084) $ 169,873 $ (41,103) ========== ========= ========= - --------------- (a) The 1997 amount does not include the gain related to the disposition of the Company's subsidiary which owned an interest in oil and gas properties in Turkey. The 1996 amount does not include the gain related to the disposition of the Company's Australasian assets. Production: Oil (MBbls).......................... 13,618 11,275 12,902 NGLs (MBbls)......................... 4,267 - - Gas (MMcf)........................... 104,868 75,851 85,295 Total (MBOE)......................... 35,363 23,916 27,118 Average daily production: Oil (Bbls)........................... 37,309 30,805 35,348 NGLs (Bbls).......................... 11,691 - - Gas (Mcf)............................ 287,309 207,244 233,685 Average oil price (per Bbl)............ $ 18.51 $ 19.96 $ 16.96 Average NGL price (per Bbl)............ $ 12.59 $ - $ - Average gas price (per Mcf)............ $ 2.20 $ 2.27 $ 1.84 Costs: Lease operating expense (per BOE).... $ 3.02 $ 3.43 $ 3.99 Production taxes (per BOE)........... $ .81 $ .91 $ .62 Workover costs (per BOE)............. $ .25 $ .27 $ .22 ------ ------- ------- Total production costs (per BOE)... $ 4.08 $ 4.61 $ 4.83 ====== ======= ======= Depletion (per BOE).................. $ 5.78 $ 4.30 $ 5.36 Oil and Gas Revenues. Revenues from oil and gas operations totaled $536.8 million in 1997, $396.9 million in 1996 and $375.7 million in 1995, representing a 35% increase from 1996 to 1997 and a 6% increase from 1995 to 1996. The increase from 1996 to 1997 is primarily attributable to increases in oil and gas production, offset by declines in commodity prices. The majority of the increased production is a direct result of the oil and gas properties acquired from Mesa. Parker & Parsley historically accounted for processed natural gas production as wellhead production on a wet gas basis while Mesa accounted for processed natural gas production in two components: natural gas liquids and dry residue gas. The combined entities own three major gas processing facilities, and the majority of the gas processed by these facilities is owned by the Company and produced by Company-operated properties. Consequently, the Company now produces a higher proportion of processed gas relative to total natural gas production and will account for natural gas production as processed natural gas liquids and dry residue gas. Separate product volumes will not be comparable for periods prior to September 30, 1997. 30 On a BOE basis, production increased by 48% for the year ended December 31, 1997, as compared to the same period in 1996. The additional production volumes from the Mesa properties contributed 85% of production growth from 1996 to 1997. The remainder of the increases are a direct result of the successes of the Company's exploration and exploitation efforts. Such production growth becomes particularly evident in light of the fact that a portion of the average daily oil and gas production for 1996 related to properties included in the 1996 sale of the Company's Australasian subsidiaries and the 1996 sale of certain nonstrategic domestic assets. Excluding production associated with assets sold during 1996 and the Mesa properties acquired in 1997, on a BOE basis, production increased 14% for the year ended December 31, 1997 as compared to the year ended 1996. The increase in oil and gas revenues from 1995 to 1996 is primarily attributable to the higher average prices being received for both oil and gas production and increases in production due to the Company's successful exploitation and exploration activities in 1995 and 1996, offset by the decreased production resulting from the 1996 sale of the Company's Australasian assets and the 1995 and 1996 sales of certain domestic assets. The average oil price received for the year ended December 31, 1997 decreased 7% (from $19.96 in 1996 to $18.51 in 1997), and the average gas price received decreased 3% (from $2.27 in 1996 to $2.20 in 1997). During 1997, the Company received an average of $12.59 per Bbl for NGLs. The average oil price received for the year ended December 31, 1996 increased 18% (from $16.96 in 1995 to $19.96 in 1996), while the average gas price received increased 23% (from $1.84 in 1995 to $2.27 in 1996). Hedging Activities The oil and gas prices that the Company reports are based on the market price received for the commodities adjusted by the results of the Company's hedging activities. The Company utilizes commodity derivative contracts (swaps, futures and options) in order to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Crude Oil. All material purchase contracts governing the Company's oil production are tied directly or indirectly to NYMEX prices. The average oil price per Bbl that the Company reports includes the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The Company's average realized price for physical oil sales (excluding hedge results) for the years ended December 31, 1997, 1996 and 1995 was $19.09 per Bbl, $21.33 per Bbl and $17.02 per Bbl, respectively. The Company recorded net reductions to oil revenues of $7.9 million, $15.4 million and $825 thousand for the years ended December 31, 1997, 1996 and 1995, respectively, as a result of its oil price hedges. Natural Gas Liquids. The Company employs a policy of hedging natural gas liquids based on actual product prices in order to mitigate some of the volatility associated with NYMEX pricing. Natural gas liquids are sold under long-term contracts which provide price flexibility and allow the Company to maximize prices between trading hubs. During the year ended December 31, 1997, the Company realized an average natural gas liquids price for physical sales (excluding hedge results) of $12.61 per Bbl and recorded a net decrease to natural gas liquids revenue of $77,600. Natural Gas. The Company employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The average gas price per Mcf that the Company reports includes the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The Company's average realized price for physical gas sales (excluding hedge results) for the years ended December 31, 1997, 1996 and 1995 was $2.41 per Mcf, $2.39 per Mcf and $1.70 per Mcf, respectively. The Company recorded net reductions to gas revenues of $21.9 million and $9.0 million for the years ended December 31, 1997 and 1996, respectively, and an increase to gas revenues of $12.1 million during 1995, as a result of its gas price hedges. See Note J of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for information concerning the Company's open hedge positions at December 31, 1997 and the related prices to be realized. 31 Production Costs. Total production costs per BOE decreased in 1997 and 1996 by approximately 11% and 5%, respectively (from $4.83 in 1995 to $4.61 in 1996 to $4.08 in 1997). The primary component of production costs, lease operating expense, has also decreased significantly, 12% in 1997 and 14% in 1996. These costs represent the majority of the oil and gas property operating expenses over which the Company has control and the costs on which the Company has focused its reduction efforts. As discussed more fully in "Natural Gas Processing" below, the Company has adopted a new method of reporting the financial results of its natural gas processing facilities and is now presenting these results as oil and gas production activities. In 1997, the operating margin from the Company's gas plants (i.e., third party processing revenues less processing costs and expenses) is included in oil and gas production costs, specifically lease operating expense, which resulted in a decrease in lease operating expense per BOE of $.07 for the year ended December 31, 1997, as compared to 1996. The additional reductions in lease operating expense during the three years ended December 31, 1997 are primarily due to the Company's concentrated efforts to evaluate and reduce all operating costs and the sale of certain high operating cost properties during 1996. Depletion Expense. Depletion expense per BOE increased 34% in 1997 (to $5.78 in 1997 from $4.30 in 1996) and decreased 20% in 1996 (from $5.36 in 1995). The increase in depletion expense per BOE in 1997 is primarily associated with the fair value allocated to Mesa's long-lived, low production cost natural gas reserves. The decrease in depletion expense per BOE in 1996 is primarily the result of the following factors: (i) the significant increase in oil and gas reserves during 1995 and 1996 resulting from the Company's exploration and development drilling activities, including revisions, and (ii) a reduction in the Company's net depletable basis from charges taken in 1995 in accordance with SFAS 121 (see "Impairment of Oil and Gas Properties" below). Impairment of Oil and Gas Properties. In accordance with SFAS 121, the Company reviews its oil and gas properties for impairment whenever events and circumstances indicate a decline in the recoverability of the carrying value of the Company's assets. Historically, a decline in the recoverability of the carrying value of the Company's oil and gas properties has been the result of depressed commodity prices. The Company recognized noncash pre-tax charges of $1.4 billion ($863 million after-tax) and $129.7 million ($84.3 million after-tax) related to its oil and gas properties during 1997 and 1995, respectively. See Note B and Note M of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further explanation of the Company's policies concerning SFAS 121 and its 1997 and 1995 charges for impairment. Exploration and Abandonments/Geological and Geophysical Costs. Exploration and abandonments/geological and geophysical costs totaled $77.2 million, $21.7 million and $27.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in 1997 is primarily the result of increased domestic exploratory drilling and geological and geophysical activity due to the expansion of the Company's exploration program. The decrease in 1996 is largely the result of decreased activity, both in exploratory drilling and geological and geophysical activity, resulting from the sale in March 1996 of the Company's Australasian assets (see " Asset Dispositions" above and Note L of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data"), offset by increases in geological and geophysical activity in the United States as a result of the Company's increased focus on exploitation and exploration activities. The following table sets forth the components of the Company's 1997, 1996 and 1995 exploration and abandonments/geological and geophysical costs: Year ended December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (in thousands) Exploratory dry holes: United States........................... $ 27,182 $ 6,256 $ 2,491 Australia and other foreign............. 5,695 3,431 9,636 Geological and geophysical costs: United States........................... 35,737 7,042 2,302 Foreign................................. 3,820 2,012 8,819 Leasehold abandonments and other......... 4,726 2,966 4,304 ------- ------- ------- $ 77,160 $ 21,707 $ 27,552 ======= ======= ======= Approximately 29% of the Company's 1998 exploration/exploitation capital budget will be spent on exploratory projects (compared to 28% in 1997 and 18% in 1996). The Company currently anticipates that its 1998 exploration efforts will be concentrated domestically in the Gulf Coast region and internationally in Argentina, Canada and Africa. 32 The Company continues to review opportunities involving exploration joint ventures in domestic and international areas outside the Company's existing core operating areas. Natural Gas Processing The Company historically reflected its ownership interests in and revenues and expenses related to its natural gas processing facilities as separate items in the consolidated financial statements while Mesa reported revenues and expenses from its natural gas processing facilities as oil and gas production costs. During the last four years, the Company has sold its interests in 12 natural gas processing facilities and now owns interests in seven facilities. The ownership interest in the remaining gas plant facilities and the related results of operations from third party gas processed through such facilities are not material to the Company's financial position. To report the results of gas processing activities consistently within the financial statements, during 1997, the Company reclassified the natural gas processing facilities into oil and gas properties for financial statement purposes and will report all third party revenues and expenses from its natural gas processing facilities in oil and gas production costs. Natural gas processing revenues were $23.8 million in 1996 and $33.3 million in 1995; and natural gas processing costs were $12.5 million in 1996 and $25.9 million in 1995. The 1996 natural gas processing revenues and costs decreased 29% and 52%, respectively, when compared to the 1995 amounts primarily due to the sale of four gas plants during 1995 and the sale of one gas plant during 1996. The average price per Bbl of NGLs increased 30% in 1996 (from $11.59 in 1995 to $15.10 in 1996), while the average price per Mcf of residue gas increased 55% in 1996 (from $1.39 in 1995 to $2.15 in 1996). During January 1996, the Company realized proceeds of $2.1 million from sales of gas plants and related assets which resulted in the Company recognizing a net pre-tax gain of $639 thousand. In addition, in October 1995, the Company sold its interests in the Cargray and Schafer plants located in Carson County, Texas. The Company received net proceeds of $9.5 million from the disposition of such plants which resulted in the Company recognizing a net pre-tax gain of $4.6 million. During 1996, the Company recognized noncash pre-tax charges of $1.3 million related to abandonments of certain of the Company's gas processing facilities and the cancellation of certain gas processing contracts. Additionally, during 1995, the Company recognized a noncash pre-tax impairment charge of $748 thousand related to a natural gas processing facility. General and Administrative Expense General and administrative expense was $48.8 million in 1997, $28.4 million in 1996 and $37.4 million in 1995, representing a 72% increase from 1996 to 1997 and a 24% decrease from 1995 to 1996. The increase from 1996 to 1997 resulted from the increased size of the Company and reorganization and relocation costs caused by the merger between Parker & Parsley and Mesa and the acquisition of Chauvco. The decrease from 1995 to 1996 is primarily due to 1995 including pre-tax charges of $10.6 million associated with the amortization of deferred compensation awarded in 1993 and organizational changes implemented by the Company that were designed to reduce overall general and administrative expenses. Interest Expense Interest expense was $77.6 million in 1997, $46.2 million in 1996 and $65.4 million in 1995. The increase from 1996 to 1997 is primarily the result of an increase in the weighted average outstanding balance of the Company's indebtedness during 1997 as compared to 1996 due to the additional debt assumed from Mesa. The decrease from 1995 to 1996 is due to a decrease of $226.3 million in the weighted average outstanding balance of the Company's indebtedness for the year ended December 31, 1996 as compared to the year ended December 31, 1995, resulting primarily from the application of proceeds from the sale of the Company's Australasian assets and the sales of certain domestic assets during 1995 and 1996, and a decrease in the weighted average interest rate on the Company's indebtedness from 8.02% in 1995 to 7.83% in 1996. In addition, the 1997, 1996 and 1995 amounts include $6 million, $12 million and $12 million of interest, respectively, associated with the preferred stock of the Company's subsidiary, Parker & Parsley Capital LLC, which was converted to common stock of the Company in July 1997 (see Note I of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data"). The 1997, 33 1996 and 1995 amounts also include $1.2 million, $1.3 million and $2 million, respectively, of amortization of capitalized loan fees. During each of the years 1997, 1996 and 1995, the Company was a party to various interest rate swap agreements. As a result, the Company recorded a reduction in interest expense of $847 thousand and $787 thousand for the years ended December 31, 1997 and 1996, respectively, and additional interest expense of $532 thousand for the year ended December 31, 1995. For a description of the Company's interest rate swap agreements, see Note J of the Notes to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data". Other Expense During 1996, Mesa entered into BTU swap agreements covering 13,036 MMBTU per day from January 1, 1997 through December 31, 2004. Under the terms of these agreements, the Company will receive a premium of $.52 per MMBTU over market natural gas prices from January 1, 1997 through December 31, 1998. Following this two-year period, the Company will receive 10% of the NYMEX oil price for the volumes covered for a six-year period beginning January 1, 1999 and ending December 31, 2004. As these derivative contracts do not qualify as hedges, the Company recorded a $5.2 million noncash pre-tax mark-to-market adjustment to the carrying value of the BTU swap agreements in 1997. These contracts will continue to be marked-to-market at the end of each reporting period during their respective lives and the effects on the Company's results of operations in future periods could be significant. Income Taxes The Company's income tax benefit of $500.3 million and $45.9 million for 1997 and 1995, respectively (both of which exclude the tax effects related to extraordinary items), and its income tax provision of $60.1 million for 1996 reflect the net provision or benefit, resulting from the separate tax calculation prepared for each tax jurisdiction in which the Company is subject to income taxes. For 1997, 1996 and 1995 the Company had effective total tax rates of approximately 36%, 30% and 31%, respectively. See Note N of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for further discussion of the Company's income tax provision and benefits. Extraordinary Items On December 18, 1997, the Company completed a cash tender offer for a significant portion of the 11-5/8% senior subordinated discount notes due 2006 and the 10-5/8% senior subordinated notes due 2006 (the "10-5/8% Notes") (collectively, the "Subordinated Notes") assumed from Mesa for a redemption price of $829.90 and $1,171.40, respectively, per $1,000 tendered plus any interest accrued on the 10 5/8% Notes (the "Tender Offer"). As a result of the Tender Offer, the Company recognized an extraordinary loss on early extinguishment of debt of $11.9 million (net of a related tax benefit of $6.4 million) during the fourth quarter of 1997. The Company financed the purchase price of the Subordinated Notes tendered in the offer with borrowings under its bank credit facility. The accompanying Consolidated Statement of Operations for the year ended December 31, 1997 also includes a $1.5 million (net of a related tax benefit of $800 thousand) noncash charge for an extraordinary loss on early extinguishment of debt resulting from the mergers. This extraordinary loss relates to capitalized issuance fees associated with Parker & Parsley's previously existing bank credit facility which was replaced by the new credit facility agreement for the Company. In October 1995, the Company transferred cash and certain oil and gas properties with an aggregate estimated value of $1.1 million in full satisfaction of a non-recourse note secured by the properties, the balance of which was approximately $7.7 million. As a result, the Company recognized an extraordinary gain on the early extinguishment of debt of $4.3 million (net of related tax expense of $2.3 million). Capital Commitments, Capital Resources and Liquidity Capital Commitments. The Company's primary needs for cash are for exploration, development and acquisitions of oil and gas properties, repayment of principal and interest on outstanding indebtedness and working capital obligations. 34 The Company's cash expenditures during 1997, 1996 and 1995 for additions to oil and gas properties (including individual property acquisitions, but not including company acquisitions) totaled $428.6 million, $219.4 million and $215.7 million, respectively. The 1997 amount includes $292.6 million for development and exploratory drilling and, as in 1996 and 1995, the Company's drilling activities were focused primarily in the Spraberry field of the Permian Basin. Significant drilling expenditures in 1997 included $99.0 million in the unitized portion of the Spraberry field of the Permian Basin (including $47.6 million in the Driver unit, $12.7 million in the Preston unit, $12.6 million in the Shackelford unit, $12.2 million in the North Pembrook unit and $10.5 million in the Merchant unit), $14.9 million in other portions of the Spraberry field, $46.5 million in other areas of the Permian Basin, $91.3 million in the onshore and offshore Gulf Coast region, $29.9 million in the MidContinent region and $11.0 million in Argentina and Guatemala. The Company's 1998 capital expenditure budget has been set at $500 million, reflecting planned expenditures of $301 million for exploitation activities, $125 million for exploration activities and $74 million for oil and gas property acquisitions in the Company's core areas. The Company budgets it capital expenditures based on projected internally-generated cash flows and routinely adjusts the level of its capital expenditures in response to anticipated changes in cash flows. Funding for the Company's working capital obligations is provided by internally-generated cash flow. Funding for the repayment of principal and interest on outstanding debt and the Company's capital expenditure program may be provided by any combination of internally-generated cash flow, proceeds from the disposition of nonstrategic assets or alternative financing sources as discussed in "Capital Resources" below. Capital Resources. The Company's primary capital resources are net cash provided by operating activities, proceeds from financing activities and proceeds from sales of nonstrategic assets. The Company expects that these resources will be sufficient to fund its capital commitments in 1998. Operating Activities Net cash provided by operating activities during 1997 of $228.2 million was comparable to that of 1996 of $230.1 million. The additional cash flow generated by increased production was offset by increased general and administrative expenses and interest expenses and the payment of certain liabilities assumed from Mesa, including severance payments made to former Mesa employees. During 1996, net cash provided by operating activities increased 47% (from $156.6 million in 1995 to $230.1 million in 1996). This increase during 1996 is primarily attributable to stronger oil and gas prices combined with declining production costs due to improvements in the Company's overall cost structure in 1995 and 1996. Financing Activities As described more fully in Note E of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data", on August 7, 1997, the Company entered into two credit facility agreements with a syndicate of banks which provide for a total domestic bank credit facility of $1.4 billion. The Company had an outstanding balance under its bank facility at December 31, 1997 of $1.4 billion (including outstanding, undrawn letters of credit of $30.6 million), leaving approximately $161 thousand of unused borrowing base immediately available. At December 31, 1997, the Company also had $234.7 million outstanding under its Canadian credit facility leaving a borrowing capacity of $55.3 million. At December 31, 1997, the Company had two other outstanding significant debt issuances. Such debt issuances consist of (i) $150 million aggregate principal amount of 8-7/8% senior notes issued by Parker & Parsley in 1995 and due in 2005 (carrying value of $150.0 million) and (ii) $150 million aggregate principal amount of 8-1/4% senior notes issued by Parker & Parsley in 1995 and due in 2007 (carrying value of $149.3 million). The weighted average interest rate for the year ended December 31, 1997 on the Company's indebtedness was 7.04% as compared to 7.83% for the year ended December 31, 1996 and 8.02% for the year ended December 31, 1995 (taking into account the effect of interest rate swaps). Senior note issuance. During January 1998, the Company completed the issuance of the following two series of senior notes for total net proceeds of $593 million. The proceeds were used primarily to repay the Company's bank indebtedness. 35 6.5% senior notes due 2008. $350 million aggregate principal amount 6.5% senior notes dated January 13, 1998, due January 15, 2008. Interest on the 6.5% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. 7.2% senior notes due 2028. $250 million aggregate principal amount 7.2% senior notes dated January 13, 1998, due July 15, 2028. Interest on the 7.2% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. Both senior note issuances are governed by an Indenture between the Company and The Bank of New York dated January 13, 1998. Both senior note issuances are general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. In addition, the Company is a holding company that conducts all its operations through subsidiaries, and the senior notes are structurally subordinated to all obligations of its subsidiaries. The senior notes were fully and unconditionally guaranteed by Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of the Company. As the Company continues to pursue its strategy, it may utilize alternative financing sources, including the issuance for cash of fixed rate long-term public debt, convertible securities or preferred stock. The Company may also issue securities in exchange for oil and gas properties, stock or other interests in other oil and gas companies or related assets. Additional securities may be of a class preferred to common stock with respect to such matters as dividends and liquidation rights and may also have other rights and preferences as determined by the Company's Board of Directors. Sales of Nonstrategic Assets. During 1997, 1996 and 1995, proceeds from the sale of domestic nonstrategic assets totaled $115.7 million, $58.4 million and $175.1 million, respectively. In addition, during 1996, the Company sold certain subsidiaries resulting in cash proceeds of $183.2 million (see Note L of Notes to Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data"). The proceeds from these sales were primarily utilized to reduce the Company's outstanding bank indebtedness and for general working capital purposes. In February 1998, the Company announced its intentions to sell domestic nonstrategic properties for proceeds ranging from $375 to $550 million. These properties represent an estimated 10% to 12% of the Company's reserves at December 31, 1997. The Company plans to complete this divestiture in the latter part of 1998. The Company anticipates that it will continue to sell nonstrategic properties from time to time to increase capital resources available for other activities and to achieve operating and administrative efficiencies and improved profitability. The consummation of the Company's 1998 divestiture plans is entirely dependent on finding one or more willing buyers who have the financial wherewithal to complete such a purchase. Until such a buyer is found, the Company may reevaluate its portfolio of properties and at any time may adjust its plans concerning divestitures. As a result, there can be no assurance that the divestiture of any or all of these properties will be completed or that the estimated proceeds will be realized. Liquidity. At December 31, 1997, the Company had $71.7 million of cash and cash equivalents on hand, compared to $18.7 million at December 31, 1996. The Company's ratio of current assets to current liabilities was 1.18 at December 31, 1997 and 1.29 at December 31, 1996. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page ---- Consolidated Financial Statements of Pioneer Natural Resources Company: Independent Auditors' Report............................................. 38 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................................... 39 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995.................................................... 40 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995................................. 41 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.................................................... 42 Notes to Consolidated Financial Statements............................... 43 Unaudited Supplementary Information...................................... 69 37 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Pioneer Natural Resources Company: We have audited the consolidated financial statements of Pioneer Natural Resources Company and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Natural Resources Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Notes B and M to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets and for long-lived assets to be disposed of in 1995 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". KPMG Peat Marwick LLP Midland, Texas February 13, 1998 38 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS December 31, ----------------------- 1997 1996 ---------- ---------- Current assets: Cash and cash equivalents.......................... $ 71,713 $ 18,711 Restricted cash.................................... 1,695 1,749 Accounts receivable: Trade, net....................................... 75,432 34,075 Affiliates....................................... - 434 Oil and gas sales................................ 116,500 48,459 Inventories........................................ 13,576 3,644 Deferred income taxes.............................. 16,900 7,400 Other current assets............................... 12,372 2,567 --------- --------- Total current assets........................... 308,188 117,039 --------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties................................ 3,575,971 1,419,051 Unproved properties.............................. 545,074 7,331 Natural gas processing facilities.................. - 59,276 Accumulated depletion, depreciation and amortization..................................... (605,203) (445,238) --------- --------- 3,515,842 1,040,420 Other property and equipment, net.................... 44,017 27,779 Other assets, net.................................... 78,543 14,627 --------- --------- $3,946,590 $1,199,865 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt............... $ 5,791 $ 5,381 Undistributed unit purchases....................... 1,695 1,749 Accounts payable: Trade ........................................... 176,697 56,713 Affiliates....................................... 9,994 7,528 Domestic and foreign income taxes.................. - 1,743 Other current liabilities.......................... 67,375 17,856 --------- --------- Total current liabilities...................... 261,552 90,970 --------- --------- Long-term debt, less current maturities.............. 1,943,718 320,908 Other noncurrent liabilities......................... 180,275 8,071 Deferred income taxes................................ 12,200 60,800 Preferred stock of subsidiary........................ - 188,820 Stockholders' equity: Preferred stock, $.01 par value; 100,000,000 shares authorized; none issued and outstanding... - - Common stock, $.01 par value; 500,000,000 shares authorized; 101,037,562 and 36,899,618 shares issued at December 31, 1997 and 1996, respectively..................................... 1,010 369 Additional paid-in capital......................... 2,359,992 462,873 Treasury stock, at cost; 591 and 1,833,383 shares at December 31, 1997 and 1996, respectively...... (21) (31,528) Unearned compensation.............................. (16,196) (1,625) Retained earnings (deficit)........................ (795,940) 100,207 --------- --------- Total stockholders' equity..................... 1,548,845 530,296 Commitments and contingencies (Note H) --------- --------- $3,946,590 $1,199,865 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 39 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, --------------------------------- 1997 1996 1995 ----------- --------- --------- Revenues: Oil and gas............................... $ 536,782 $ 396,931 $ 375,720 Natural gas processing.................... - 23,814 33,258 Gas marketing............................. - - 76,784 Interest and other........................ 4,278 17,458 11,364 Gain on disposition of assets, net........ 4,969 97,140 16,620 ---------- -------- -------- 546,029 535,343 513,746 ---------- -------- -------- Costs and expenses: Oil and gas production.................... 144,170 110,334 130,905 Natural gas processing.................... - 12,528 25,865 Gas marketing............................. - - 75,664 Depletion, depreciation and amortization.. 212,435 112,134 159,058 Impairment of oil and gas properties and natural gas processing facilities....... 1,356,390 - 130,494 Exploration and abandonments.............. 77,160 23,030 27,552 General and administrative................ 48,763 28,363 37,409 Interest.................................. 77,550 46,155 65,449 Other..................................... 7,124 2,451 11,357 ---------- -------- -------- 1,923,592 334,995 663,753 ---------- -------- -------- Income (loss) before income taxes and extraordinary item........................ (1,377,563) 200,348 (150,007) Income tax benefit (provision).............. 500,300 (60,100) 45,900 ---------- -------- -------- Income (loss) before extraordinary item...... (877,263) 140,248 (104,107) Extraordinary item - gain (loss) on early extinguishment of debt, net of tax........ (13,408) - 4,338 ---------- -------- -------- Net income (loss)............................ $ (890,671) $ 140,248 $ (99,769) ========== ======== ======== Income (loss) per share: Basic: Income (loss) before extraordinary item. $ (16.88) $ 3.95 $ (2.96) Extraordinary item...................... (.26) - .12 ---------- -------- -------- Net income (loss)....................... $ (17.14) $ 3.95 $ (2.84) ========== ======== ======== Diluted: Income (loss) before extraordinary item. $ (16.88) $ 3.47 $ (2.96) Extraordinary item...................... (.26) - .12 ---------- -------- -------- Net income (loss)....................... $ (17.14) $ 3.47 $ (2.84) ========== ======== ======== Dividends declared per share................. $ .10 $ .10 $ .10 ========== ======== ======== Weighted average shares outstanding.......... 51,973 35,475 35,090 =========== ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 40 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Additional Unearned Retained Cumulative Total Common Paid-in Treasury Compen- Earnings Translation Stockholders' Stock Capital Stock sation (Deficit) Adjustment Equity ------ ---------- --------- -------- --------- ----------- ------------ Balance at January 1, 1995..... $ 359 $ 445,321 $ (6,788) $ (5,726) $ 66,779 $ 9,639 $ 509,584 Common stock issued............ 2 3,963 - - - - 3,965 Exercise of long-term incentive plan stock options........... 2 2,065 223 (365) - - 1,925 Restricted shares awarded...... 1 769 - (1,387) - - (617) Tax benefits related to stock options................ - 600 - - - - 600 Purchase of treasury stock..... - - (279) - - - (279) Amortization of unearned compensation................. - - - 5,423 - - 5,423 Net loss....................... - - - - (99,769) - (99,769) Dividends ($.10 per share)..... - - - - (3,501) - (3,501) Currency translation adjustment................... - - - - - (6,336) (6,336) ----- --------- ------- ------- -------- ------ --------- Balance at December 31, 1995... 364 452,718 (6,844) (2,055) (36,491) 3,303 410,995 ----- --------- ------- ------- -------- ------ --------- Exercise of long-term incentive plan stock options........... 5 6,899 - - - - 6,904 Restricted shares awarded...... - 1,091 - (1,199) - - (108) Restricted shares forfeited.... - (35) (13) 48 - - - Tax benefits related to stock options................ - 2,200 - - - - 2,200 Purchase of treasury stock..... - - (24,671) - - - (24,671) Amortization of unearned compensation................. - - - 1,581 - - 1,581 Net income..................... - - - - 140,248 - 140,248 Dividends ($.10 per share)..... - - - - (3,550) - (3,550) Currency translation adjustment................... - - - - - (3,303) (3,303) ----- --------- ------- ------- -------- ------ --------- Balance at December 31, 1996... 369 462,873 (31,528) (1,625) 100,207 - 530,296 ----- --------- ------- ------- -------- ------ --------- Common stock issued: Acquisition of MESA, Inc..... 318 982,248 - - - - 982,566 Acquisition of Chauvco Resources, Ltd............. 249 688,081 - - - - 688,330 Acquisition of properties.... 16 44,857 - - - - 44,873 Exercise of long-term incentive plan stock options........... 5 11,591 - - - - 11,596 Cancellation of treasury shares (19) (34,441) 34,460 - - - - Exchange of Preferred Shares for common shares............ 67 182,909 - - - - 182,976 Restricted shares awarded...... 5 18,974 - (18,079) - - 900 Tax benefits related to stock options................ - 2,900 - - - - 2,900 Purchase of treasury stock..... - - (2,953) - - - (2,953) Amortization of unearned compensation................. - - - 3,508 - - 3,508 Net loss....................... - - - - (890,671) - (890,671) Dividends ($.10 per share)..... - - - - (5,476) - (5,476) ----- --------- ------- ------- -------- ------ --------- Balance at December 31, 1997... $1,010 $2,359,992 $ (21) $(16,196) $(795,940) $ - $1,548,845 ===== ========= ======= ======= ======== ====== =========
The accompanying notes are an integral part of these consolidated financial statements. 41 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ---------------------------------- 1997 1996 1995 ---------- --------- --------- Cash flows from operating activities: Net income (loss)...................................... $ (890,671) $ 140,248 $ (99,769) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization........... 212,435 112,134 159,058 Impairment of oil and gas properties and natural gas processing facilities....................... 1,356,390 - 130,494 Exploration expenses, including dry holes.......... 63,288 17,262 23,500 Deferred income taxes.............................. (501,300) 57,400 (44,900) Gain on disposition of assets, net................. (4,969) (97,140) (16,620) (Gain) loss on early extinguishment of debt, net of tax...................................... 13,408 - (4,338) Other noncash items................................ 18,886 (1,360) 16,770 Change in operating assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable................................ (39,774) (2,674) 4,870 Inventory.......................................... (5,941) 1,842 682 Other current assets............................... (1,913) (32) 1,146 Accounts payable................................... 27,138 (656) (15,712) Accrued income taxes and other current liabilities. (18,768) 3,035 2,758 Other................................................ - 47 (1,383) --------- -------- -------- Net cash provided by operating activities....... 228,209 230,106 156,556 --------- -------- -------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired......... (15,490) - - Proceeds from disposition of wholly-owned subsidiaries, net of cash disposed................... - 183,181 - Proceeds from disposition of assets.................... 115,735 58,370 175,085 Additions to oil and gas properties.................... (428,640) (219,394) (215,731) Other property additions, net.......................... (12,783) (8,428) (11,954) --------- -------- -------- Net cash provided by (used in) investing activities................................... (341,178) 13,729 (52,600) --------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt........................ 821,148 782 334,458 Principal payments on long-term debt................... (648,208) (222,157) (434,681) Payments of other noncurrent liabilities............... (7,740) (2,534) (1,588) Deferred loan fees/issuance costs...................... (2,396) (20) (4,121) Dividends.............................................. (5,476) (3,550) (3,501) Purchase of treasury stock............................. (2,953) (24,671) (279) Exercise of long-term incentive plan stock options..... 11,596 6,904 1,925 Other ................................................ - (108) (137) --------- -------- -------- Net cash provided by (used in) financing activities................................... 165,971 (245,354) (107,924) --------- -------- -------- Effect of exchange rate changes on cash and cash equivalents............................................ - 290 (299) Net increase (decrease) in cash and cash equivalents ..... 53,002 (1,519) (3,968) Cash and cash equivalents, beginning of year.............. 18,711 19,940 24,207 --------- -------- -------- Cash and cash equivalents, end of year.................... $ 71,713 $ 18,711 $ 19,940 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 42 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE A. Organization and Nature of Operations Pioneer Natural Resources Company (the "Company"), is a Delaware Corporation whose common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange. The Company was formed as a result of the merger between Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa"). Both Parker & Parsley and Mesa were oil and gas exploration and production concerns with ownership interest in oil and gas properties located principally in the MidContinent, Southwestern and onshore and offshore Gulf Coast regions of the United States, and with limited international interests. In accordance with the provisions of Accounting Principles Board No. 16, "Business Combinations", the merger has been accounted for as a purchase of Mesa by Parker & Parsley. As a result, the historical financial statements for the Company are those of Parker & Parsley, and the Company's financial statements present the addition of Mesa's assets and liabilities as an acquisition by Parker & Parsley in August 1997. Specifically, the accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows include the financial results of Mesa beginning in August 1997. NOTE B. Summary of Significant Accounting Policies Principles of consolidation. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries since their acquisition or formation and the Company's interest in the affiliated oil and gas partnerships for which it serves as general partner through certain of its wholly-owned subsidiaries. Investments in less-than-majority-owned subsidiaries where the Company has the ability to exercise significant influence over the investee's operations are accounted for by the equity method; otherwise, they are accounted for at cost. The Company proportionately consolidates less-than-100%-owned oil and gas partnerships in accordance with industry practice. The Company owns less than a 20% interest in the oil and gas partnerships that it proportionally consolidates. All material intercompany balances and transactions have been eliminated. Use of estimates in the preparation of financial statements. Preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand and depository accounts held by banks. Restricted cash at December 31, 1997 and 1996 represents the Company's remaining obligation to redeem for cash the unconverted limited partner units in the Prudential-Bache Energy limited partnerships acquired in 1993. Inventories. Inventories consist of lease and well equipment which are carried at the lower of cost (first-in, first-out) or market. Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties as promulgated by Statement of Financial Accounting Standards No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs are expensed. The Company capitalizes interest on expenditures for significant development projects until such time as significant operations commence. Capitalized costs relating to proved properties are depleted using the unit-of-production method based on proved reserves expressed as BOE as prepared by the Company's engineers, except for Canada, which were prepared by 43 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 independent petroleum engineers. Costs of significant nonproducing properties, wells in the process of being drilled and development projects are excluded from depletion until such time as the related project is developed and proved reserves are established or impairment is determined. Capitalized costs of individual properties sold or abandoned are charged to accumulated depletion, depreciation and amortization. Proceeds from sales of individual properties are credited to property costs. No gain or loss is recognized until the entire amortization base is sold. If significant, the Company accrues the estimated future costs to plug and abandon wells under the units-of-production method. The charge, if any, is reflected in the accompanying Consolidated Statements of Operations as abandonment expense while the liability is reflected in the accompanying Consolidated Balance Sheets as other liabilities. Plugging and abandonment liabilities assumed in a business combination accounted for as a purchase are recorded at fair value. At December 31, 1997 and 1996, the Company has a plugging and abandonment liability of $35.9 million and $29,675, respectively. Unproved oil and gas properties that are individually significant are periodically assessed for impairment by comparing their cost to their estimated value on a project-by-project basis. The estimated value is affected by results of exploration activities, future sales or expiration of all or a portion of such projects. If the quantity of proved reserves determined by such evaluation is not sufficient to fully recover the cost invested in each project, the Company will recognize a loss at the time of impairment by providing an impairment allowance. The remaining unproved oil and gas properties are aggregated and an overall impairment allowance is provided based on the Company's historical experience. Impairment of long-lived assets. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In this circumstance, the Company recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Natural gas processing facilities. Through December 31, 1996, the Company depreciated its gas processing, gathering and transmission facilities and equipment on a straight-line basis over the estimated useful lives of the assets, which ranged from 14 to 21 years. Capitalized costs relating to gas contracts, representing the right to extract liquids and gas, were amortized on a plant-by-plant basis using the unit-of-production method over the lives of gas reserves expected to be processed through the facility, as prepared by the Company's engineers. Upon disposition of a natural gas processing facility, the cost and related accumulated depreciation and amortization was eliminated from the accounts and any gain or loss was included in operations. In 1997, the Company began accounting for its natural gas processing facilities activities as part of its oil and gas properties for financial reporting purposes. During 1997, all third party revenues and expenses attributable to the Company's natural gas processing facilities have been reported as oil and gas production costs, and the capitalized costs of natural gas processing facilities are included in proved oil and gas properties. Treasury stock. Treasury stock purchases are recorded at cost. Upon reissuance, the cost of treasury shares held is reduced by the average purchase price per share of the aggregate treasury shares held. Income taxes. The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax 44 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the consolidated U.S. federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities. Income (loss) per share. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") which simplifies the existing standards for computing earnings per share ("EPS") and makes them comparable to international standards. In accordance with the provisions of SFAS 128, the Company adopted SFAS 128 in its year ended December 31, 1997 financial statements and all prior period EPS information (including interim EPS) have been restated. Under SFAS 128, primary EPS is replaced by "basic" EPS, which excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. "Diluted" EPS, which is computed similarly to fully-diluted EPS, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For 1997 and 1995, the computation of diluted net loss per share was antidilutive; therefore, the amounts reported for basic and diluted net loss per share were the same. The computation of diluted net income per share for the year ended December 31, 1996 assumes conversion of the Company's 6-1/4% Cumulative Guaranteed Monthly Income Convertible Preferred Shares ("Preferred Shares") which increased the weighted average number of shares outstanding to 42.6 million. Environmental. The Company is subject to extensive federal, state, local and foreign environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability are fixed or reliably determinable. The Company believes that the costs for compliance with current environmental laws and regulations have not had and will not have a material effect on the Company's financial position or results of operations. Revenue recognition. The Company uses the entitlements method of accounting for crude oil and natural gas revenues. Sales proceeds in excess of the Company's entitlement are included in other liabilities and the Company's share of sales taken by others is included in other assets in the accompanying Consolidated Balance Sheets. As of December 31, 1997, such assets and liabilities total $49.2 million and $20.2 million, respectively. The Company did not have a material amount recorded in other assets or other liabilities associated with gas balancing during 1996. Stock-based compensation. The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the Company has only adopted the disclosure provisions of Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation" ("SFAS 123"). See Note G for the pro forma disclosures of compensation expense determined under the fair-value provisions of SFAS 123. Hedging. The financial instruments that the Company accounts for as hedging contracts must meet the following criteria: the underlying asset or liability must expose the Company to price or interest rate risk that is not offset in another asset or liability, the hedging contract must reduce that price or interest rate risk, and the instrument must be designated as a hedge at the inception of the contract and throughout the hedge period. In order to 45 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 qualify as a hedge, there must be clear correlation between changes in the fair value of the financial instrument and the fair value of the underlying asset or liability such that changes in the market value of the financial instrument will be offset by the effect of price or interest rate changes on the exposed items. See Note J for a description of the specific types of hedging transactions in which the Company participates. Foreign currency translation. The financial statements of non-U.S. entities are translated to U.S. dollars as follows: all assets and liabilities at year-end exchange rates; revenues, costs and expenses at average exchange rates. Gains and losses from translating non-U.S. balances are recorded directly in stockholders' equity. Foreign currency transaction gains and losses are included in net income (loss). A summary of the exchange rates used in the preparation of these consolidated financial statements appear below: December 31, ------------------------ 1997 1996 1995 ------ ------ ------ U.S. Dollar from Canadian Dollar - Balance sheet .6997 N/A N/A U.S. Dollar from Australian Dollar - Statements of operations N/A .7562 .7431 Reclassifications. Certain reclassifications have been made to the 1996 and 1995 amounts to conform to the 1997 presentation. NOTE C. Disclosures About Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996 ----------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- -------- -------- (in thousands) Financial assets: Cash, cash equivalents and restricted cash $ 73,408 $ 73,408 $ 20,460 $ 20,460 Financial liabilities: Long-term debt: Practicable to estimate fair value: Lines of credit and term note 1,608,980 1,608,980 9,000 9,000 8-7/8% senior notes due 2005 150,000 170,025 150,000 165,945 8-1/4% senior notes due 2007 149,345 166,950 149,277 160,965 Not practicable to estimate fair value: Other long-term debt 41,184 - 18,012 - Derivative financial instruments, including off-balance sheet instruments (see Note J): Interest rate swaps 2,100 2,704 - 1,782 Foreign currency agreements (7,438) (7,438) - - Commodity price hedges (689) 12,061 - (35,560) BTU swap agreements (6,893) (6,893) - -
Cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and other current liabilities. The carrying amounts approximate fair value due to the short maturity of these instruments. Long-term debt. The carrying amount of borrowings outstanding under the Company's line of credit (see Note E for definition and description of each) approximates fair value because these instruments bear interest at rates tied to current market rates. The fair values of each of the senior note issuances were based on quoted market prices for each of these issues. 46 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 It was not practicable to estimate the fair value of certain of the long-term debt obligations because quoted market prices are not available and the Company does not have a current borrowing rate which could be used as a comparable rate for the stated maturities of the obligations. Interest rate swap agreements. At December 31, 1997, the Company had the following interest rate agreements outstanding: five interest rate fixed-rate to floating-rate swap agreements with an aggregate notional amount of $150 million, one floating-rate to fixed-rate swap agreement with a notional amount of $250 million, one cross-currency interest swap with a notional amount of $60 million, and one interest rate cap agreement denominated in Canadian dollars with a notional amount of C$80 million. At December 31, 1996, the Company had the five fixed-rate to floating-rate swap agreements mentioned above outstanding with an aggregate notional amount of $150 million. These are more fully described in Note J. The fair values of each of the open interest rate swap agreements were obtained from quotes by the respective counterparties and represent the estimated net amount the Company would receive or pay upon termination of the agreements as of December 31 of each of the respective years, taking into consideration interest rates at that time. Foreign currency agreements. At December 31, 1997, the Company had two foreign exchange swap agreements with an aggregate remaining notional amount of $216 million. These are more fully described in Note J. The fair values of these agreements were obtained from quotes from the counterparty and represent the amount the Company would pay upon termination of the agreements at December 31, 1997, based upon the spot and forward foreign currency exchange rates existing in the market at that time. Commodity price hedges. The fair values of commodity price hedges outstanding at December 31, 1997 and 1996 were obtained from quotes provided by the individual counterparties for each agreement and represent the amount the Company would be required to pay as of December 31 of each of the respective years, based upon the differential between a fixed and a variable commodity price as specified in the hedge contracts. BTU swap agreements. The fair value of the Btu swap agreements outstanding at December 31, 1997 were obtained from quotes provided by the counterparty to these agreements and represent the amount the Company would be required to pay as of December 31, 1997 based upon the market price for oil and gas as specified in the agreements. NOTE D. Acquisitions During August 1997, Parker & Parsley completed a merger with Mesa that resulted in the creation of the Company. The transaction was accounted for as a purchase of Mesa by Parker & Parsley in accordance with Accounting Principles Board No. 16, "Business Combinations". In December 1997, the Company acquired the Canadian and Argentine oil and gas business of Chauvco Resources, Ltd. ("Chauvco"), which was also accounted for as a purchase by the Company. These transactions were accomplished through the issuance of common stock of the Company to Mesa and Chauvco shareholders (31,782,263 shares and 24,916,934 shares, respectively). The aggregate purchase consideration for assets acquired and liabilities assumed from Mesa and Chauvco was $991.0 million and $696.4 million, respectively. The following table represents the allocation of the total purchase price of Mesa and Chauvco to the acquired assets and liabilities based upon the fair values assigned to each of the significant assets acquired and liabilities assumed. Any future adjustments to the allocation of the purchase price are not anticipated to be material to the Company's financial statements. 47 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Allocation of Aggregate Purchase Consideration ----------- ---------- Mesa Chauvco ----------- ---------- (in thousands) Net working capital $ 4,480 $ (19,989) Property, plant and equipment 2,514,649 1,164,797 Other assets 52,693 32,025 Long-term debt (1,191,038) (234,709) Other non-current liabilities, including deferred taxes (389,814) (245,748) ---------- --------- $ 990,970 $ 696,376 ========== ========= The Company common stock consideration $ 982,566 $ 688,330 Transaction costs 8,404 8,046 ---------- --------- Aggregate purchase consideration $ 990,970 $ 696,376 ========== ========= The liabilities assumed include amounts recorded for litigation and certain other preacquisition contingencies of Mesa and Chauvco. On December 19, 1997, the Company completed an acquisition of assets in the East Texas Basin from American Cometra, Inc. ("ACI") and Rockland Pipeline Co. ("Rockland"), both subsidiaries of Electrafina S.A. of Belgium ("America Cometra Acquisition"). The total consideration paid was approximately $130 million, consisting of $85 million in cash and 1.6 million shares of the Company's common stock. The Company acquired ACI's producing wells, acreage, seismic data, royalties and mineral interests, and Rockland's gathering system pipeline and gas processing plant in the East Texas Basin. Pro forma results of operations. The following table reflects the pro forma results of operations as though the merger with Mesa, the acquisition of Chauvco, the 1996 sale of certain wholly-owned subsidiaries and the 1996 sale of certain nonstrategic domestic assets occurred on January 1, 1996. The pro forma results of operations of the America Cometra Acquisition are not presented as they are not material to the consolidated financial statements of the Company. Year ended December 31, --------------------- 1997 1996 --------- --------- (in thousands, except per share data) (Unaudited) Revenues............................................. $ 909,564 $ 959,208 Income (loss) before extraordinary item.............. $(931,784) $ 48,717 Income (loss) per share before extraordinary item.... $ (9.42) $ .49 48 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE E. Long-term Debt Long-term debt consists of the following: December 31, ----------------------- 1997 1996 ---------- ---------- (in thousands) Lines of credit and term note.................... $1,608,980 $ 9,000 8-7/8% senior notes due 2005..................... 150,000 150,000 8-1/4% senior notes due 2007 (net of discount)... 149,345 149,277 Other............................................ 41,184 18,012 --------- --------- 1,949,509 326,289 Less current maturities.......................... 5,791 5,381 --------- --------- $1,943,718 $ 320,908 ========= ========= Maturities of long-term debt at December 31, 1997 are as follows (in thousands): 1998............................................ $ 5,791 1999............................................ 34,098 2000............................................ 10,943 2001............................................ 12,053 2002............................................ 1,357,646 Thereafter...................................... 528,978 Lines of credit and term note. On August 7, 1997, the successor to Parker & Parsley and Mesa Operating Company, Pioneer Natural Resources USA, Inc. ("Pioneer USA") (the "Borrower"), entered into two credit Facility Agreements ("Credit Facility Agreements") with a syndicate of banks (the "Banks") that refinanced the credit facilities of Parker & Parsley and Mesa. On December 18, 1997, the Company amended and restated the Credit Facility Agreements to substitute the Company as the Borrower in place of Pioneer USA. One Credit Facility Agreement (the "Primary Facility") provides for a $1.075 billion credit facility. The maturity date for the Primary Facility is August 7, 2002. The second Credit Facility Agreement (the "364-day Facility") provides for a $300 million credit facility with a maturity date of August 5, 1998. The Borrower has the option to renew the 364-day Facility for another period of 364 days by notifying the lending banks in writing of such election not more than 60 days and not less than 45 days prior to the maturity date. Advances on both Credit Facility Agreements bear interest, at the Borrower's option, based on (a) the prime rate of NationsBank of Texas, N.A. ("Prime Rate") (8.5% at December 31, 1997), (b) a Eurodollar rate (substantially equal to the London Interbank Offered Rate ("LIBOR")), adjusted for the reserve requirement as determined by the Board of Governors of the Federal Reserve System with respect to transactions in Eurocurrency liabilities ("LIBOR Rate"), or (c) a competitive bid rate as quoted by the lending banks electing to participate pursuant to a request by the Borrower. Advances that are LIBOR Rate have periodic maturities, at the Borrower's option, of one, two, three, six, nine or twelve months. Advances that are competitive bid rate have periodic maturities, at the Borrower's option, of not less than 15 days nor more than 360 days. The interest rates on the LIBOR Rate advances vary, with the interest rate margin ranging from 18 basis points to 47 basis points. The interest rate margin is determined by a grid based upon the Company's senior unsecured long-term public debt rating. The Company's obligations are guaranteed by Pioneer USA and certain other U.S. subsidiaries, and are secured by a pledge of a portion of the capital stock of certain non-U.S. subsidiaries. The Credit Facility Agreements contain various restrictive covenants and compliance requirements, which include (a) limits on the incurrence of additional indebtedness and certain types of liens and (b) restrictions as to merger, sale or transfer of assets and transactions without the Banks' consent. 49 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 The Company also executed a $100 million note (the "Term Note"), dated as of December 22, 1997, payable to NationsBank of Texas, N.A. to fund short-term working capital needs. The Term Note has a maturity date of April 1, 1999, and bears interest at the borrower's option, at the Prime Rate or the LIBOR Rate. At the request of the Company, the Term Note was canceled on January 20, 1998. Also, on December 18, 1997, the Company refinanced all of Chauvco's outstanding debt by establishing a $290 million Canadian credit facility under which the borrower is Pioneer Natural Resources Canada Inc. (formerly known as Chauvco), and the Company and certain of its subsidiaries (not including Pioneer USA) provide guarantees. Senior notes. At December 31, 1997, the following two issuances of senior indebtedness were outstanding. 8-7/8% senior notes due 2005. $150 million aggregate principal amount 8-7/8% senior notes dated April 12, 1995, due April 15, 2005. Interest on the 8-7/8% senior notes is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1995. 8-1/4% senior notes due 2007. $150 million aggregate principal amount 8-1/4% senior notes dated August 22, 1995, due August 15, 2007. These 8-1/4% senior notes were sold at a discount aggregating $816,000. Interest on the 8-1/4% senior notes is payable semi-annually on February 15 and August 15 of each year, commencing February 15, 1996. Both senior note issuances are governed by an Indenture between the Company and The Chase Manhattan Bank (National Association) dated April 12, 1995. Both senior note issuances are general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. In addition, the Company is a holding company that conducts all its operations through subsidiaries, and the senior notes issuances are structurally subordinated to all obligations of its subsidiaries. Pioneer USA has fully and unconditionally guaranteed both senior note issuances. Tender Offer for Senior Subordinated Notes. On December 18, 1997, the Company completed a cash tender offer for two senior subordinated note issuances (the "Subordinated Notes") assumed as part of the merger with Mesa. The Company redeemed approximately 91% of the 11-5/8% senior subordinated discount notes due 2006 and approximately 98% of the 10-5/8% senior subordinated notes due 2006 (the "10-5/8% Notes") for a purchase price of $829.90 and $1,171.40, respectively, per $1,000 tendered plus any interest accrued on the 10-5/8% Notes (the "Tender Offer"). As a result, the Company paid $574.5 million for the principal amount tendered on the Subordinated Notes, including related fees, and $15.7 million of accrued interest on the 10-5/8% Notes. As a result of the Tender Offer, the Company recognized an extraordinary loss on early extinguishment of debt of $11.9 million (net of a related tax benefit of $6.4 million) during the fourth quarter of 1997. The Company financed the purchase price of the Subordinated Notes tendered in the offer with borrowings under its Credit Facility Agreements. Extraordinary item. In addition to the extraordinary loss resulting from the Tender Offer described above, the accompanying Consolidated Statement of Operations for the year ended December 31, 1997 includes a $1.5 million (net of a related tax benefit of $800 thousand) noncash charge for an extraordinary loss on early extinguishment of debt resulting from the mergers. This extraordinary loss relates to capitalized issuance fees associated with Parker & Parsley's previously existing bank credit facility which was replaced by the new Credit Facility Agreements for the Company. In October 1995, the Company transferred cash and certain oil and gas properties with an aggregate estimated value of $1.1 million in full satisfaction of a non-recourse note secured by the properties, the balance of which was approximately $7.7 million. As a result, in 1995, the Company recognized an extraordinary gain on the early extinguishment of debt of $4.3 million (net of related tax expense of $2.3 million). 50 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Interest expense. The following amounts have been charged to interest expense for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 ------- ------- ------- (in thousands) Cash payments for interest..................... $64,667 $44,405 $59,767 Cash payments for commitment and agency fees... 1,073 804 1,650 Accretion of discounts on loans................ 7,348 261 617 Amortization of capitalized loan fees.......... 1,177 1,286 2,022 Net change in accruals......................... 3,285 (601) 1,393 ------ ------ ------ $77,550 $46,155 $65,449 ====== ====== ====== The above amounts include $6 million in 1997, $12 million in 1996 and $12 million in 1995 associated with the Preferred Shares of the Company's wholly-owned finance subsidiary (see Note I). NOTE F. Related Party Transactions Activities with affiliated partnerships. The Company, through its wholly-owned subsidiaries, has in the past sponsored certain affiliated partnerships, including thirty-five public and nine private drilling partnerships and three public income partnerships, all of which were formed primarily for the purpose of drilling and completing wells or acquiring producing properties. In accordance with the terms of the partnership agreements and the related tax partnership agreements of the affiliated partnerships, the Company participated in the activities of the sponsored partnerships on a promoted basis. In 1992, the Company discontinued sponsoring public and private oil and gas development drilling and income partnerships. During each of 1994, 1993 and 1992, the Company formed a Direct Investment Partnership for the purpose of permitting selected key employees to invest directly, on an unpromoted basis, in wells that the Company drills. The partners in the Direct Investment Partnerships formed in 1994, 1993 and 1992 pay and receive approximately .337%, 1.5375% and 1.865%, respectively, of the costs and revenues attributable to the Company's interest in the wells in which such Direct Investment Partnership participates. The Company discontinued the formation of Direct Investment Partnerships in 1995. The Company, through a wholly-owned subsidiary, serves as operator of properties in which it and its affiliated partnerships have an interest. Accordingly, the Company receives producing well overhead, drilling well overhead and other fees related to the operation of the properties. The affiliated partnerships also reimburse the Company for their allocated share of general and administrative charges. The activities with affiliated partnerships are summarized for the following related party transactions for the years ended December 31, 1997, 1996 and 1995: 1997 1996 1995 ------ ------ ------ (in thousands) Receipt of lease operating and supervision charges in accordance with standard industry operating agreements........................................... $8,547 $8,484 $8,458 Reimbursement of general and administrative expenses... 1,476 1,246 1,153 Retirement Plans. Effective August 8, 1997, the Compensation Committee of the Board of Directors approved a deferred compensation retirement plan for the officers and certain key employees of the Company. Each officer and key employee is allowed to contribute up to 25% of their base salary. The Company will then provide a matching contribution of 100% of the officer's and key employee's contribution limited to the first 10% of the officer's base salary and 8% of the key employee's base salary. The Company's matching contribution vests immediately. A trust fund has been established by the Company to accumulate the contributions made under this retirement plan. The Company does not have a defined benefit retirement plan. 51 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 During 1996 and prior to August 1997, the officers of Parker & Parsley participated in a similar deferred compensation retirement plan as noted above. As part of the merger with Mesa, the plan's change of control provision was triggered and all funds contributed through August 1997 were immediately vested and distributed. Consulting Fee. Effective September 1, 1997, the Company entered into an agreement with Rainwater, Inc., the general partner of DNR-Mesa Holdings, L.P. ("DNR"), modifying certain terms of a prior agreement between DNR and Mesa. The prior agreement was assumed by the Company upon consummation of the merger between Parker & Parsley and Mesa. Pursuant to the terms of this agreement, as modified, the Company will pay Rainwater, Inc. $400,000 per year and reimburse Rainwater, Inc. for certain expenses in consideration for certain consulting and financial analysis services to the Company by Rainwater, Inc. and its representatives. NOTE G. Incentive Plans Long-Term Incentive Plan In August 1997, the Company's stockholders approved a new long-term incentive plan (the "Long-Term Incentive Plan"), which provides for the granting of incentive awards in the form of stock options, stock appreciation rights, performance units and restricted stock to directors, officers and employees of the Company. The Long-Term Incentive Plan provides for the issuance of a maximum number of shares of common stock equal to 10% of the total number of shares of common stock equivalents outstanding minus the total number of shares of common stock subject to outstanding awards on the date of calculation under any other stock-based plan for the directors, officers or employees of the Company. The following table summarizes the cumulative stock and option awards granted, forfeited, exercised, in the case of options, and the lapse of restrictions, in the case of shares, under the Company's Long-Term Incentive Plan during 1997: For the year ended December 31, 1997 ------------------------------------- Shares Options Total --------- --------- --------- Granted 476,914 1,716,625 2,193,539 Forfeited - - - Options exercised - - - Shares with lapse of restrictions - - - --------- ---------- ---------- Outstanding, end of year 476,914 1,716,625 2,193,539 --------- ---------- --------- The following table calculates the number of shares or options available for grant under the Company's Long-Term Incentive Plan as of December 31, 1997: December 31, 1997 ----------------- Shares outstanding 101,036,971 Options outstanding 1,716,625 ----------- 102,753,596 =========== Maximum shares/options allowed under Long-Term Incentive Plan 10,275,360 Less: Outstanding awards under Long-Term Incentive Plan (2,193,539) Outstanding options under Mesa 1991 stock option plan (418,478) Outstanding options under Mesa 1996 incentive plan (510,000) Outstanding options under Parker & Parsley long-term incentive plan (896,042) ----------- Shares/options available for future grant 6,257,301 =========== 52 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Restricted stock awards Non-employee directors. Pursuant to the Long-Term Incentive Plan, on the last business day of the month in which the annual meeting of the stockholders of the Company is held, each non-employee director will automatically receive an award of Common Stock equal to 50% of the then current annual retainer fee. This award is made in lieu of an amount of cash equal to 50% of the annual retainer fee. The number of shares included in each such award is determined by dividing 50% of the annual retainer fee by the closing sales price of the Company's common stock on the business day immediately preceding the date of the award. In August 1997, each non-employee director received 50% of the amount of the annual retainer fee to be paid to such non-employee director as compensation for his services during the 1997 annual term in restricted stock. The Company issued 5,939 shares pursuant to this arrangement. When issued, the shares of common stock awarded pursuant to the Long-Term Incentive Plan are subject to transfer restrictions that lapse on the first anniversary of the date of the award. In addition, if a non-employee director's services as a director of the Company are terminated for any reason before the next annual meeting of the Company's stockholders, a portion of the shares are forfeited, with the number of forfeited shares being based on the number of regularly scheduled meetings of the Board of Directors remaining to be held before the next annual meeting of the Company's stockholders. Officers and key employees. The Company's policy is to pay any annual bonuses awarded to selected officers and key employees partially in cash and partially in the form of restricted stock awards under the Long-Term Incentive Plan. The Company has established target bonus levels for each officer and key employee. Based upon Company and individual performance during the year, each officer or key employee has the potential to earn more or less than their target bonus level. The bonus awards are determined in the quarter following the Company's December 31 year-end. Any restricted stock awarded pursuant to this program will be limited to one-half of each officer's or key employee's target bonus level, and the remainder of the officer's or key employee's annual bonus will be paid in cash. The number of shares of restricted stock that are awarded pursuant to the annual bonus program is based on the closing sales price of the Company's common stock on the day immediately preceding the date of the award. Ownership of the restricted stock awarded vests one year after the date it is issued but is subject to transfer restrictions that lapse on one-third of the shares on each of the first, second and third anniversaries of the date of grant. Each recipient of restricted stock also receives an amount of cash equal to the estimated federal income taxes payable as a result of the receipt of such award. On February 9, 1998, the Company awarded an aggregate of 81,378 shares of restricted stock at a price of $22.375 pursuant to the 1997 annual bonus program. During 1997, the Company has made other Long-Term Incentive Plan awards of 470,975 shares to certain officers and key employees. The shares awarded are subject to a vesting period and transfer restrictions. Stock Options Awards The Company has a program of awarding annual stock options to its officers and employees as part of their annual compensation package. This program provides for annual awards at an exercise price based upon the closing sales price of the Company's common stock on the date of grant, a three year vesting schedule and a five year exercise period from each vesting date. The Company granted 1,719,625 options under the Long-Term Incentive Plan during 1997. Other Stock Based Plans Prior to the merger with Mesa, both Parker & Parsley and Mesa had long-term incentive plans (Parker & Parsley Long-Term Incentive Plan, 1991 Stock Option Plan of Mesa and the 1996 Incentive Plan of Mesa) in place that allowed Parker & Parsley and Mesa to grant incentive awards similar to the provisions of the Long-Term Incentive Plan. Upon consummation of the merger between Parker & Parsley and Mesa, all awards under these plans were assumed by the Company with the provision that no additional awards be granted under these plans. 53 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 The information presented in the remainder of this footnote represents the awards granted under the Long-Term Incentive Plan since its approval in August 1997, the awards granted in 1997, 1996 and 1995 under the Parker & Parsley Long-Term Incentive Plan, and the assumption in August 1997 of the outstanding option awards granted under the 1991 Stock Option Plan of Mesa and the 1996 Incentive Plan of Mesa. Restricted stock awards. The following table reflects the outstanding restricted stock awards and activity related thereto for 1997, 1996 and 1995:
For the year ended For the year ended For the year ended December 31, 1997 December 31, 1996 December 31, 1995 ------------------- ------------------- ------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Shares Price of Shares Price of Shares Price --------- -------- --------- -------- --------- --------- Restricted stock awards: Restricted shares outstanding at beginning of year............. 79,819 $ 23.35 225,244 $ 23.90 476,034 $ 24.46 Shares granted................ 506,786 $ 37.43 35,080 $ 26.54 33,834 $ 19.21 Shares forfeited.............. - $ - (1,980) $ 25.13 - $ - Lapse of restrictions......... (109,691) $ 25.66 (178,525) $ 24.65 (284,624) $ 24.28 -------- -------- -------- Restricted shares outstanding at end of year....................... 476,914 $ 37.88 79,819 $ 23.35 225,244 $ 23.90 ======== ======== ========
Stock options awards. The Company applies APB 25 and related Interpretations in accounting for its stock option awards. Accordingly, no compensation expense has been recognized for its stock option awards. If compensation expense for the stock option awards had been determined consistent with SFAS 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below: For the year ended December 31, --------------------------------- 1997 1996 1995 ---------- --------- ---------- (in thousands, except per share amounts) Net income (loss): $(893,729) $ 139,297 $ (99,891) Basic net income (loss) per share: $ (17.20) $ 3.90 $ (2.83) Diluted net income (loss) per share: $ (17.20) $ 3.43 $ (2.83) Under SFAS 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995: 1997 1996 1995 ---------- ---------- ---------- Risk-free interest rate 5.72% 6.18% 6.06% Expected life 7 years 4 years 4 years Expected volatility 36% 32% 35% Expected dividend yield .30% .34% .52% 54 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 A summary of the Company's stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ended on those dates is presented below:
For the year ended For the year ended For the year ended December 31, 1997 December 31, 1996 December 31, 1995 -------------------- -------------------- --------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Shares Price of Shares Price of Shares Price --------- -------- --------- -------- --------- -------- Non-statutory stock options: Outstanding at beginning of year 1,362,629 $ 24.04 1,230,411 $ 17.51 924,075 $ 15.39 Options granted............... 1,744,704 $ 34.00 637,300 $ 29.52 514,283 $ 19.23 Options assumed............... 928,478 $ 33.97 - - - - Options forfeited............. (1,500) $ 21.33 (35,000) $ 23.81 (16,664) $ 26.18 Options exercised............. (493,166) $ 23.45 (470,082) $ 14.55 (191,283) $ 10.97 --------- --------- --------- Outstanding at end of year...... 3,541,145 $ 31.63 1,362,629 $ 24.04 1,230,411 $ 17.51 ========= ========= ========= Exercisable at end of year...... 1,824,520 $ 29.37 358,177 $ 18.79 616,591 $ 14.89 ========= ========= ========= Weighted average fair value of options granted during the year......... $ 16.10 $ 10.03 $ 6.71 ======== ======== ========
The following table summarizes information about the Company's stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable --------------------------------------------------- ------------------------------------ Number Weighted Average Weighted Weighted Range of Outstanding at Remaining Average Number Exercisable Average Exercise Prices December 31, 1997 Contractual Life Exercise Price at December 31, 1997 Exercise Price - --------------- ----------------- ---------------- -------------- -------------------- -------------- $ 6 - 15 115,291 3.0 years $ 13.22 115,291 $ 13.22 $19 - 28 1,019,989 4.9 years $ 24.41 911,989 $ 24.03 $29 - 38 1,483,294 4.5 years $ 30.27 461,619 $ 29.98 $39 - 52 903,642 4.3 years $ 43.29 316,692 $ 46.61 $80 - 82 18,929 2.3 years $ 81.81 18,929 $ 81.81 ----------- ---------- 3,541,145 1,824,520 =========== ==========
The Company recognized $3.3 million, $1.9 million and $7.7 million in compensation expense related to its Incentive Plans during 1997, 1996 and 1995, respectively. NOTE H. Commitments and Contingencies Severance agreements. On August 8, 1997, the Company entered into severance agreements with its parent company and subsidiary company officers. Salaries and bonuses for the Company's officers are set independent of this severance agreement by the Compensation Committee for the parent company officers and the Management Committee for subsidiary company officers. These committees can grant increases or reductions to base salary at its discretion. The current annual salaries for the parent company officers and the subsidiary company officers covered under such severance agreement total approximately $3.1 million and $3.2 million, respectively. Either the Company or the officer may terminate the officer's employment under the severance agreement at any time. The Company must pay the officer an amount equal to one year's base salary if employment is terminated because of death, disability, or normal retirement. The Company must pay the officer an amount equal to one year's base salary and continue health insurance for the officer and his immediate family for one year if the Company terminates employment without cause or if the officer terminates employment with good reason, which occurs when reductions in the officer's base annual salary exceed specified limits or if the officer is demoted to an officer position junior to 55 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 their current officer position or to a non-officer position. If within one year after a change in control of the Company, the Company terminates the officer without cause or if the officer terminates employment with good reason, the Company must pay parent company officers an amount equal to 2.99 times the sum of the officer's base salary plus target bonus for the year and subsidiary company officers an amount equal to two times the officer's base salary and continue health insurance for the officer and his immediate family for one year. If the officer terminates employment with the Company without good reason between six months and one year after a change in control, or at any time within one year after a change in control if the officer is required to move, then the Company must pay the officer one year's base salary and continue health insurance for the officer and his immediate family for one year. Officers are also entitled to additional payments for certain tax liabilities that may apply to severance payments following a change in control. Indemnifications. The Company has indemnified its directors and certain of its officers, employees and agents with respect to claims and damages arising from acts or omissions taken in such capacity, as well as with respect to certain litigation. Legal actions. The Company is party to various legal actions incidental to its business, including, but not limited to, the proceedings described below. The majority of these lawsuits primarily involve claims for damages arising from oil and gas leases and ownership interest disputes. The Company believes that the ultimate disposition of these legal actions will not have a material adverse effect on the Company's consolidated financial position, liquidity, capital resources or future results of operations. The Company will continue to evaluate its litigation matters on a quarter-by-quarter basis and will adjust the litigation reserve as appropriate to reflect the then current status of its litigation. Masterson. In February 1992, the current lessors of an oil and gas lease (the "Gas Lease") dated April 30, 1955, between R.B. Masterson et al., as lessor, and Colorado Interstate Gas Company ("CIG"), as lessee, sued CIG in Federal District Court in Amarillo, Texas, claiming that CIG had underpaid royalties due under the Gas Lease. Under the agreements with CIG, the Company, as successor to Mesa, has an entitlement to gas produced from the Gas Lease. In August 1992, CIG filed a third-party complaint against the Company for any such royalty underpayment which may be allocable to the Company. Plaintiffs alleged that the underpayment was the result of CIG's use of an improper gas sales price upon which to calculate royalties and that the proper price should have been determined pursuant to a "favored-nations" clause in a July 1, 1967, amendment to the Gas Lease. The plaintiffs also sought a declaration by the court as to the proper price to be used for calculating future royalties. The plaintiffs alleged royalty underpayments of approximately $500 million (including interest at 10%) covering the period from July 1, 1967, to the present. In March 1995, the court made certain pretrial rulings that eliminated approximately $400 million of the plaintiff's claims (which related to periods prior to October 1, 1989), but which also reduced a number of the Company's defenses. The Company and CIG filed stipulations with the court whereby the Company would have been liable for between 50% and 60%, depending on the time period covered, of an adverse judgment against CIG or post-February 1988 underpayments of royalties. On March 22, 1995, a jury trial began and on May 4, 1995, the jury returned its verdict. Among its findings, the jury determined that CIG had underpaid royalties for the period after September 30, 1989, in the amount of approximately $140,000. Although the plaintiffs argued that the "favored-nations" clause entitled them to be paid for all of their gas at the highest price voluntarily paid by CIG to any other lessor, the jury determined that the plaintiffs were estopped from claiming that the "favored-nations" clause provides for other than a pricing-scheme to pricing-scheme comparison. In light of this determination, and the plaintiff's stipulation that a pricing-scheme to pricing-scheme comparison would not result in any "trigger prices" or damages, defendants asked the court for a judgment that plaintiffs take nothing. The court, on June 7, 1995, entered final judgment that plaintiffs recover no monetary damages. The plaintiffs filed a motion for new trial on June 22, 1995. The court, on July 18, 1997, denied plaintiffs' motion. The plaintiffs have appealed to the Fifth Circuit. On June 7, 1996, the plaintiffs filed a separate suit against CIG and the Company in state court in Amarillo, Texas, similarly claiming underpayment of royalties under the "favored-nations" clause, but based upon the above-described 56 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 pricing-scheme to pricing-scheme comparison on a well-by-well monthly basis. The plaintiffs also claim underpayment of royalties since June 7, 1995, under the "favored-nations" clause based upon either the pricing-scheme to pricing-scheme method or their previously alleged higher price method. The Company believes it has several defenses to this action and intends to contest it vigorously. The Company has not yet determined the amount of damages, if any, that would be payable if such action was determined adversely to the Company. The federal court in the above-referenced first suit issued an order on July 29, 1996, which stayed the state suit pending the plaintiffs' resolution of the first suit. However, based on the jury verdict and final judgment, the Company does not currently expect the ultimate resolution of either of these lawsuits to have a material adverse effect on its financial position or results of operations. Kansas Ad Valorem Tax The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for natural gas. Based on a Federal Energy Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, Mesa collected the Kansas ad valorem tax in addition to the otherwise maximum lawful price. The FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC failed to provide a reasoned basis for its findings and remanded the case to the FERC for further consideration. On December 1, 1993, the FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. The FERC clarified the effective date of its decision by an order dated May 18, 1994. The order clarified that the effective date applies to tax bills rendered after June 28, 1988, not sales made on or after that date. Numerous parties filed appeals on the FERC's action in the D.C. Circuit. Various natural gas producers challenged the FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in any event, have been applied prospectively. Other parties challenged the FERC's orders on the grounds that the FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996, which holds that producers must make refunds of all Kansas ad valorem tax collected with respect to production since October 4, 1983 as opposed to June 28, 1988. Petitions for rehearing were denied on November 6, 1996. Various natural gas producers subsequently filed a petition for writ of certiori with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by the FERC). Williams Natural Gas Company filed a cross-petition for certiori seeking to impose refund liability back to December 1, 1978. Both petitions were denied on May 12, 1997. The Company and other producers filed petitions for adjustment with the FERC on June 24, 1997. The Company is seeking waiver or set-off from FERC with respect to that portion of the refund associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the higher prices collected, and (iii) interest for all periods. On September 10, 1997, FERC denied this request, and on October 10, 1997, the Company and other producers filed a request for rehearing. Pipelines were given until November 10, 1997 to file claims on refunds sought from producers and refunds totaling approximately $30 million were made against the Company. Although the Company is unable at this time to predict the final outcome of this matter or the amount, if any, that will ultimately be refunded, the Company has recorded a $30 million provision for such litigation in the accompanying Consolidated Balance Sheet at December 31, 1997. 57 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Lease agreements. The Company leases equipment and office facilities under noncancellable operating leases on which rental expense for the years ended December 31, 1997, 1996 and 1995 was approximately $3.7 million, $2.9 million and $3.6 million, respectively. Future minimum lease commitments under noncancellable operating leases at December 31, 1997 are as follows (in thousands): 1998.................................. $ 7,648 1999.................................. 6,625 2000.................................. 5,321 2001.................................. 2,149 2002.................................. 1,493 Thereafter............................ 1,860 NOTE I. Preferred Stock of Subsidiary On July 28, 1997, the Company issued 6.7 million shares of common stock in exchange for the 3,776,400 Preferred Shares outstanding. These Preferred Shares were originally issued by Parker & Parsley Capital LLC, a wholly-owned finance subsidiary of the Company, in 1994. As a result of the exchange, the $188.8 million reflected in the caption "Preferred stock of subsidiary" in the accompanying Consolidated Balance Sheet as of December 31, 1996 was reclassified, net of unamortized issuance costs of $5.8 million, into stockholders' equity. During 1997, 1996 and 1995, the Company recorded $6 million, $12 million and $12 million, respectively, of interest expense associated with the Preferred Shares. NOTE J. Derivative Financial Instruments The Company has only limited involvement with derivative financial instruments and generally does not use them for trading purposes. They are used to manage well-defined interest rate and commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counterparties to its interest rate swap agreements and its commodity hedges. The Company anticipates, however, that such counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of the counterparties. As part of the acquisitions of Mesa and Chauvco, the Company became the successor to certain derivative financial instruments entered into by Mesa or Chauvco which do not qualify for hedge accounting treatment. Such instruments will be marked-to-market at the end of each reporting period during their respective lives and the effects on the Company's results of operations in future periods could be significant. During 1998, the Company intends to review each of these instruments to determine if it is feasible to unwind such instruments in light of market conditions. Those instruments not qualifying for hedge accounting are designated under the heading "Mark-to-Market Derivatives" below. Hedge Derivatives Interest rate swap agreements. During the second quarter of 1996, the Company entered into a series of interest rate swap agreements for an aggregate amount of $150 million with four counterparties. These agreements, which have a term of three years, effectively convert a portion of the Company's fixed-rate borrowings into floating-rate obligations. The weighted average fixed rate being received by the Company over the term of these agreements is 6.62% while the weighted average variable rate paid by the Company for the years ended December 31, 1997 and 1996 was 5.78% and 5.56%, respectively. The variable rate will be redetermined approximately every six months based upon the London interbank offered rate at that point in time. The Company is also party to an interest rate swap agreement for an aggregate amount of $250 million with one counterparty. This two-year agreement expires in August 1998 and effectively converts a portion of the Company's floating-rate borrowings into fixed-rate obligations. The effect of this agreement is to provide the Company with an interest rate of 6.23% on $250 million in nominal principal amount for the term of the agreement. Under market conditions at December 31, 1997, the effective annual interest rate associated with this agreement was 6.51%. The accompanying Consolidated Statements of Operations for the years ended December 31, 1997 and 58 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 and 1996 include a reduction in interest expense of $847 thousand and $787 thousand, respectively, to account for the settlement of these rate swap agreements. During 1997, the Company entered into two agreements with a counterparty that obligated the Company to sell U.S. Treasury securities at a designated point in the future. The face amount of the U.S. Treasury securities to be sold is $300 million at interest rates ranging from 6.05% to 6.33%. These agreements effectively convert a portion of the Company's floating-rate borrowings into fixed-rate obligations. In January 1998, the Company terminated these agreements at a cost of $16.8 million. This amount will be amortized over the life of the Company's Primary Facility. Commodity hedges. The Company utilizes various swap and option contracts to (i) reduce the effect of the volatility of price changes on the commodities the Company produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. Crude oil. All material purchase contracts governing the Company's oil production are tied directly or indirectly to NYMEX prices. The following table sets forth the Company's outstanding oil hedge contracts as of December 31, 1997.
First Second Third Fourth Yearly Quarter Quarter Quarter Quarter Average ------------ ------------ ------------ ------------ ------------ Daily oil production: 1998 - Swap Contracts Volume (Bbl) 12,900 11,581 8,900 8,900 10,555 Price per Bbl $ 19.23 $ 19.36 $ 19.75 $ 19.74 $ 19.48 1998 - Collar Options Volume (Bbl) 2,000 2,000 2,000 2,000 2,000 Price per Bbl $18.40-21.50 $18.40-21.50 $18.40-21.50 $18.40-21.50 $18.40-21.50 1998 - Put Options Volume (Bbl) 2,000 2,000 2,000 2,000 2,000 Price per Bbl $ 18.40 $ 18.40 $ 18.40 $ 18.40 $ 18.40
The Company reports average oil prices per Bbl including the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The following table sets forth the Company's oil prices, both realized and reported, and net effects of settlements of oil price hedges to revenue: Year ended December 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Average price reported per Bbl $ 18.51 $ 19.96 $ 16.96 Average price realized per Bbl $ 19.09 $ 21.33 $ 17.02 Reduction to revenue (in millions) $ 7.9 $ 15.4 $ .8 Natural Gas Liquids. The Company employs a policy of hedging natural gas liquids based on actual product prices in order to mitigate some of the volatility associated with NYMEX pricing. Natural gas liquids are sold under long-term contracts which provide price flexibility and allow the Company to maximize prices between trading hubs. At December 31, 1997, the Company had no outstanding NGL hedge contracts. During year ended December 31, 1997, the Company reported average natural gas liquids prices of $12.59 per Bbl while realizing an average price for physical sales (excluding hedging results) of $12.61 per Bbl and recorded a net decrease to natural gas liquids revenue of $77,600. 59 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Natural Gas. The Company employs a policy of hedging gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The following table sets forth the Company's outstanding gas hedge contracts as of December 31, 1997. Prices included herein represent the Company's weighted average index price per MMBtu and, as an additional point of reference, the weighted average price for the portion of the Company's gas which is hedged based on NYMEX.
First Second Third Fourth Yearly Quarter Quarter Quarter Quarter Average ---------- -------- -------- ------- --------- Daily gas production: 1998 - Swap Contracts Volume (Mcf) 170,346 87,643 75,000 48,478 94,977 Index price per MMBtu $ 2.51 $ 2.20 $ 2.17 $ 2.16 $ 2.33 NYMEX price per MMBtu $ 2.61 $ 2.28 $ 2.27 $ 2.32 $ 2.44 1998 - Collar Options Volume (Mcf) 40,000 - - - 9,863 Index price per MMBtu $2.50-3.44 $ - $ - $ - $2.50-3.44 1998 - Put Options Volume (Mcf) 3,278 102,555 122,500 72,772 75,596 Index price per MMBtu $ 2.50 $ 1.88 $ 1.87 $ 1.87 $ 1.88 1999 - Swap Contracts Volume (Mcf) 15,000 37,445 32,500 10,951 23,986 Index price per MMBtu $ 1.86 $ 2.04 $ 2.07 $ 2.07 $ 2.03 NYMEX price per MMBtu $ 2.03 $ 2.03 $ 2.15 $ 2.32 $ 2.10
In addition to the open positions above for the first quarter of 1998, the Company has sold short put options for 43,278 MMBtu's per day. Consequently, there is no effective minimum price to be realized from the collar and put options if the NYMEX price falls below $2.48. The Company reports average gas prices per Mcf including the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The following table sets forth the Company's gas prices, both realized and reported, and net effects of settlements of gas price hedges to revenue: Year ended December 31, -------------------------- 1997 1996 1995 ------ ------ ------ Average price reported per Mcf $ 2.20 $ 2.27 $ 1.84 Average price realized per Mcf $ 2.41 $ 2.39 $ 1.70 Addition/(reduction) to revenue (in millions) $(21.9) $ (9.0) $ 12.1 Mark-to-Market Derivatives Interest rate swap/currency swap. At December 31, 1997, the Company was party to a swap agreement with a counterparty in which the Company paid a fixed-rate of interest in Canadian dollars and received a fixed-rate of interest in U.S. dollars. This agreement was entered into in 1994 and expires in 2001. During its term the notional amount of the swap is U.S. $60 million through August 1998 at which time it reduces by U.S. $15 million per year until termination. The C$ notional amount also reduces accordingly during this period while maintaining the U.S.$/C$ exchange rate specified in the agreement. The overall effect of this agreement is that the Company pays a fixed rate of 6.50% on the C$ notional amount utilizing a fixed currency conversion rate of $U.S./C$ of 1.343. Interest rate cap. At December 31, 1997, the Company was party to an interest rate cap agreement with a counterparty which caps the Canadian dollar banker's acceptance rate at 8.00% on a notional amount of C$80 million. The agreement was entered into in 1997 and expires in September 1999. Under the agreement, the Company pays the counterparty a fixed amount in C$ on a quarterly 60 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 basis. The counterparty has no payment obligation to the Company until such time as the Canadian banker's acceptance reference rate exceeds 8.00%. The effect of this agreement, in periods in which the reference rate is below 8.00%, is to increase the interest rate on C$80 million of floating-rate debt by 28 basis points (0.28%). Foreign currency agreements. The Company has a series of forward foreign exchange swap agreements to exchange one currency for a second currency at future dates for a fixed amount of the first currency. As of December 31, 1997, the U.S. dollar equivalent of foreign currency exchange swap agreements approximated $216 million. All such contracts were Canadian dollars to U.S. dollar swaps. The average forward rate achieved on these swaps at December 31, 1997 was $1.365 to one Canadian dollar. These contracts mature at various dates in the fourth quarter of 2000. Fair market value adjustment. During 1996, Mesa entered into BTU swap agreements covering 13,036 MMBTU per day from January 1, 1997 through December 31, 2004. Under the terms of these agreements, the Company will receive a premium of $.52 per MMBTU over market natural gas prices from January 1, 1997 through December 31, 1998. Following this two-year period, the Company will receive 10% of the NYMEX oil price for the volumes covered for a six-year period beginning January 1, 1999 and ending December 31, 2004. As these derivative contracts do not qualify as hedges, the Company recorded a $5.2 million noncash pre-tax mark-to-market adjustment to the carrying value of the BTU swap agreements in 1997. These contracts will continue to be marked-to-market at the end of each reporting period during their respective lives and the effects on the Company's results of operations in future periods could be significant. NOTE K. Sales to Major Customers The Company's share of oil and gas production is sold to various purchasers. The Company is of the opinion that the loss of any one purchaser would not have an adverse effect on the ability of the Company to sell its oil and gas production. The following customers individually accounted for more than 10% of the consolidated oil and gas revenues of the Company: Percentage of Consolidated Customer Oil and Gas Revenues ------------------------ 1997 1996 1995 ---- ---- ---- Genesis Crude Oil, L.P...................... 23% 28% 19% Mobil Oil Corporation....................... 16% 22% 17% Producers Energy Marketing, LLC (a)......... 11% 6% - Western Gas Resources....................... 10% 9% 4% - ------------- (a) Producers Energy Marketing, LLC ("ProEnergy") is a natural gas marketing company in which the Company owned a noncontrolling member interest of approximately 10% during 1997 and 1996. Effective January 1, 1998, the Company has withdrawn as a member of ProEnergy. At December 31, 1997, the amounts receivable from Genesis, Mobil, ProEnergy and Western were $7.9 million, $5.9 million, $9.2 million and $7.8 million, respectively, which are included in the caption "Accounts receivable - oil and gas sales" in the accompanying Consolidated Balance Sheet. NOTE L. Disposition of Australasian Assets On March 28, 1996, the Company completed the sale of certain wholly-owned Australian subsidiaries to Santos Ltd., and on June 20, 1996, the Company completed the sale of another wholly-owned subsidiary, Bridge Oil Timor Sea, Inc., to Phillips Petroleum International Investment Company. During the year 61 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 ended December 31, 1996, the Company received aggregate consideration of $237.5 million for these combined sales which consisted of $186.6 million of proceeds for the equity of such entities, $21.8 million for reimbursement of certain intercompany cash advances, and the assumption of such subsidiaries' net liabilities, exclusive of oil and gas properties, of $29.1 million. The accompanying Consolidated Statement of Operations for the year ended December 31, 1996 includes a pre-tax gain of $83.3 million from the disposition of these subsidiaries (net of transaction expenses of $8.7 million) and an income tax provision of $16 million. The income tax provision for the year ended December 31, 1996, includes $6.4 million related to the write-off of certain net operating loss carryforwards which, with the sale of the income producing assets in the Australian tax jurisdiction, will not be utilized in the future. NOTE M. Impairment of Long-Lived Assets In accordance with SFAS 121, the Company reviews its oil and gas properties for impairment whenever events and circumstances indicate a decline in the recoverability of the carrying value of the Company's oil and gas properties. Based upon a decline in the Company's outlook for future commodity prices during December 1997 and January 1998, the Company estimated the expected future cash flows of its oil and gas properties and compared such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. For those oil and gas properties for which the carrying amount exceeded the estimated future cash flows, an impairment was determined to exist; therefore, the Company adjusted the carrying amount of those oil and gas properties to their fair value as determined by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result, the Company recognized noncash pre-tax charges of $1.4 billion ($863 million after tax) related to its oil and gas properties during 1997. In 1995, the Company recognized a noncash pre-tax charge of $129.7 million ($84.3 million after tax) after performing a similar review of its oil and gas properties. The Company also recognized a noncash pre-tax charge of $748,000 ($486,000 after tax) related to a natural gas processing facility in 1995. NOTE N. Income Taxes Income tax provision (benefit) and amounts separately allocated were as follows: Year ended December 31, -------------------------------- 1997 1996 1995 --------- -------- --------- (in thousands) Income (loss) before extraordinary item.... $(500,300) $ 60,100 $(45,900) Extraordinary gain (loss).................. (7,200) - 2,300 Benefit arising from exercise of stock options.................................. (2,900) (2,200) (600) Change in cumulative translation adjustment............................... - - (550) -------- ------- ------- $(510,400) $ 57,900 $(44,750) ======== ======= ======= 62 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Income tax provision (benefit) attributable to income (loss) before extraordinary item consists of the following: Year ended December 31, ------------------------------------ 1997 1996 1995 ---------- --------- --------- (in thousands) Current: U.S. federal.................. $ 900 $ 300 $ (1,000) State and local............... 100 - - --------- -------- -------- 1,000 300 (1,000) --------- -------- -------- Deferred: U.S. federal.................. (470,000) 51,700 (35,500) State and local............... (28,500) - - Foreign....................... (2,800) 8,100 (9,400) --------- -------- -------- (501,300) 59,800 (44,900) --------- -------- -------- Total........................... $ (500,300) $ 60,100 $ (45,900) ========= ======== ======== Income (loss) before income taxes and extraordinary item consists of the following: Year ended December 31, ----------------------------------- 1997 1996 1995 ----------- --------- --------- (in thousands) Income (loss) before income taxes and extraordinary item: U.S. federal..................... $(1,369,582) $ 121,680 $(118,871) Foreign.......................... (7,981) 78,668 (31,136) ---------- -------- -------- $(1,377,563) $ 200,348 $(150,007) ========== ======== ======== Reconciliations of the U.S. federal statutory rate to the Company's effective rate for income (loss) before extraordinary item are as follows: 1997 1996 1995 ------- ------- ------ U.S. federal statutory tax rate................... (35.0%) 35.0% (35.0%) Disposition of foreign subsidiaries............... - (6.9%) - Amortization of foreign permanent differences..... - - 3.1% State income tax, net of federal income tax benefit......................................... (1.3%) - - Rate differential on foreign operations........... - .4% (.1%) Other............................................. - 1.5% 1.4% ------- ------- ------- Consolidated effective tax rate................... (36.3%) 30.0% (30.6%) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows: December 31, --------------------- 1997 1996 --------- -------- (in thousands) Deferred tax assets: Net operating loss carryforwards................... $ 184,438 $ 23,704 Alternative minimum tax credit carryforwards....... 4,903 4,005 Other.............................................. 57,248 7,716 -------- ------- Total gross deferred tax assets.................. 246,589 35,425 -------- ------- Deferred tax liabilities: Oil and gas properties, principally due to differences in basis and depletion and the deduction of intangible drilling costs for tax purposes..................................... 206,721 88,790 Other.............................................. 35,168 35 -------- ------- Total gross deferred tax liabilities............. 241,889 88,825 -------- ------- Net deferred tax asset (liability)............... $ 4,700 $(53,400) ======== ======= 63 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on expectations for the future and the availability of certain tax planning strategies that would generate taxable income to realize the net tax benefits, if implemented, management has determined that taxable income of the Company will more likely than not be sufficient to fully utilize available carryforwards prior to their ultimate expiration. At December 31, 1997, the Company had net operating loss carryforwards ("NOLs") for U.S. federal income tax purposes of $527 million, which are available to offset future regular taxable income, if any. Additionally, the Company has alternative minimum tax net operating loss carryforwards ("AMT NOLs") of $460 million, which are available to reduce future alternative minimum taxable income, if any. These carryforwards expire as follows: Expiration Date NOLs AMT NOLs --------------- --------- --------- (in thousands) December 31, 2002................ $ 2,554 $ 3,463 December 31, 2003................ 838 - December 31, 2005................ 11,049 10,762 December 31, 2006................ 26,420 8,451 December 31, 2007................ 105,085 102,069 December 31, 2008................ 112,508 106,558 December 31, 2009................ 129,357 101,978 December 31, 2010................ 116,025 103,699 December 31, 2012................ 23,129 23,013 --------- --------- $ 526,965 $ 459,993 ========= ========= As discussed in Note B, certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the Company's consolidated U.S. federal income tax return, and separate provisions for income taxes have been determined for these entities or groups of entities. As a result, the NOLs and AMT NOLs from certain of these subsidiaries are subject to various utilization limitations. In total, approximately $80.1 million of the NOLs and $60.4 million of the AMT NOLs are limited in use to specific entities or groups of entities. Section 382 of the Internal Revenue Code provides another limitation to $303.3 million of the Company's total NOLs and AMT NOLs. The Company believes the utilization of $260 million of its NOLs and AMT NOLs subject to the Section 382 limitation are limited in each taxable year to approximately $20 million and the remaining $43.3 million of its NOLs and AMT NOLs subject to the Section 382 limitation are limited in each taxable year to approximately $10 million. The tax returns and the amount of taxable income or loss are subject to examination by U.S. federal, state and foreign taxing authorities. Current and estimated tax payments of $2.7 million, $970,000 and $93,000 were made in 1997, 1996 and 1995, respectively. NOTE O. Operations by Geographic Area The Company operates in one industry segment. As a result of the acquisition of Chauvco, the Company had identifiable assets of $2.7 billion in the United States, $725 million in Canada and $495 million in Argentina at December 31, 1997. During 1997 and 1996, the Company did not have significant operations in geographic areas other than the United States. Information about the Company's operations for the year ended December 31, 1995 by different geographic areas is shown below. 64 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 Year ended December 31, ------------------------------------- 1995 ------------------------------------- Australia United and Other States Foreign Total ----------- ---------- --------- (in thousands) Operating revenue..................... $ 439,957 $ 45,805 $ 485,762 Loss before income taxes and extraordinary item................. $ (118,871) $ (31,136) $ (150,007) Identifiable assets................... $ 1,120,738 $ 198,491 $1,319,229 NOTE P. Earnings per Share In accordance with the requirements of SFAS 128, the following table provides a reconciliation between basic and diluted earnings per share for the year ended December 31, 1996. For 1997 and 1995 the computation of diluted net loss per share was antidilutive; therefore, the amounts reported for basic and diluted net loss per share were the same. Per Share Income Shares Amount ---------- ------- --------- (in thousands) Basic EPS: Income available to common stockholders $ 140,248 35,475 $ 3.95 ======== Effect of Dilutive Securities: Options/restricted stock - 394 Preferred shares 7,683 6,714 -------- ------- Diluted EPS: Income available to common stockholders plus assumed conversions $ 147,931 42,583 $ 3.47 ========= ======= ======== NOTE Q. Pioneer USA Pioneer USA is a wholly-owned subsidiary of the Company that has fully and unconditionally guaranteed certain debt securities of the Company (see Note E above). The Company has not prepared financial statements and related disclosures for Pioneer USA under separate cover because management of the Company has determined that such information is not material to investors. In accordance with practices accepted by the U.S. Securities and Exchange Commission ("SEC"), the Company has prepared Consolidating Financial Statements in order to quantify the assets of Pioneer USA as a subsidiary guarantor. The following Consolidating Balance Sheet and Consolidating Statement of Operations present financial information for Pioneer Natural Resources Company as the Parent on a stand-alone basis (carrying any investments in subsidiaries under the equity method), financial information for Pioneer USA on a stand-alone basis (carrying any investment in non-guarantor subsidiaries under the equity method), financial information for the non-guarantor subsidiaries of the Company on a consolidated basis, the consolidation and elimination entries necessary to arrive at the information for the Company on a consolidated basis, and the financial information for the Company on a consolidated basis. Pioneer USA is not restricted from making distributions to the Company. Pioneer USA's guarantees of the Company's debt securities were executed as a result of the merger with Mesa in August 1997. Consequently, a Consolidating Balance Sheet at December 31, 1996 and Consolidating Statements of Operations for the years ended December 31, 1996 and 1995 have not been presented. 65 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 CONSOLIDATING BALANCE SHEET At December 31, 1997 ASSETS
Pioneer Natural Resources Non- Company Pioneer Guarantor The (Parent) USA Subsidiaries Eliminations Company ---------- ----------- ------------ ------------ ---------- Current assets: Cash and cash equivalents............. $ 41 $ 49,033 $ 22,639 $ $ 71,713 Restricted cash....................... - 1,695 - 1,695 Accounts receivable: Trade, net.......................... 5 56,424 19,003 75,432 Oil and gas sales................... - 82,145 34,355 116,500 Intercompany notes receivable......... 2,088,082 (1,673,443) (414,639) - Inventories........................... - 11,677 1,899 13,576 Deferred income taxes................. 16,700 - 200 16,900 Other current assets.................. - 9,293 3,079 12,372 --------- ---------- ---------- --------- Total current assets.............. 2,104,828 (1,463,176) (333,464) 308,188 --------- ---------- ---------- --------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties................. - 2,453,750 1,122,221 3,575,971 Unproved properties............... - 98,664 446,410 545,074 Accumulated depletion, depreciation and amortization.................... - (504,628) (100,575) (605,203) --------- ---------- ---------- --------- - 2,047,786 1,468,056 3,515,842 --------- ---------- ---------- --------- Other property and equipment, net....... - 26,096 17,921 44,017 Other assets, net....................... 4,705 68,715 28,098 (22,975) 78,543 Investment in subsidiaries.............. 645,113 284,046 - (929,159) - --------- ---------- ---------- --------- $2,754,646 $ 963,467 $ 1,180,611 $3,946,590 ========= ========== ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt. $ - $ 538 $ 28,228 $ (22,975) $ 5,791 Undistributed unit purchases......... - 1,695 - 1,695 Accounts payable: Trade ............................. 663 113,432 62,602 176,697 Affiliates......................... 90 9,904 - 9,994 Other current liabilities............ 5,771 59,953 1,651 67,375 --------- ---------- ---------- --------- Total current liabilities........ 6,524 185,522 92,481 261,552 --------- ---------- ---------- --------- Long-term debt, less current maturities 1,700,500 565 242,653 1,943,718 Other noncurrent liabilities........... - 140,668 39,607 180,275 Deferred income taxes.................. (216,253) - 228,453 12,200 Stockholders' equity: GP Capital........................... - - 4 (4) - LP Capital........................... - - 397 (397) - Preferred stock...................... - - - - Common stock......................... 901 1 110 (2) 1,010 Additional paid-in capital........... 2,058,935 2,049,072 739,518 (2,487,533) 2,359,992 Treasury stock, at cost.............. (21) - - (21) Unearned compensation................ - (16,196) - (16,196) Retained deficit..................... (795,940) (1,396,165) (162,612) 1,558,777 (795,940) --------- ---------- ---------- --------- Total stockholders' equity....... 1,263,875 636,712 577,417 1,548,845 Commitments and contingencies --------- ---------- ---------- --------- $2,754,646 $ 963,467 $ 1,180,611 $3,946,590 ========= ========== ========== =========
66 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 CONSOLIDATING STATEMENT OF OPERATIONS For the Year Ended December 31, 1997
Pioneer Natural Resources Non- Consolidated Company Pioneer Guarantor Income The (Parent) USA Subsidiaries Tax Benefit Eliminations Company ---------- ----------- ------------ ----------- ------------ ----------- Revenues: Oil and gas.................. $ - $ 453,771 $ 83,011 $ $ $ 536,782 Interest and other........... - 5,357 873 (1,952) 4,278 Gain on disposition of assets, net........................ - 6,062 (402) (691) 4,969 ---------- ---------- --------- ---------- - 465,190 83,482 546,029 ---------- ---------- --------- ---------- Costs and expenses: Oil and gas production....... - 128,644 15,526 144,170 Depletion, depreciation and amortization............... - 166,495 45,940 212,435 Impairment of oil and gas properties and natural gas processing facilities...... - 1,220,920 135,470 1,356,390 Exploration and abandonments. - 67,679 9,481 77,160 General and administrative... 613 44,766 3,384 48,763 Interest..................... 5,910 67,969 5,623 (1,952) 77,550 Equity loss from subsidiary.. 1,407,844 124,874 - (1,532,718) - Other........................ - 7,065 59 7,124 ---------- ---------- --------- ---------- 1,414,367 1,828,412 215,483 1,923,592 ---------- ---------- --------- ---------- Loss before income taxes and extraordinary item........... (1,414,367) (1,363,222) (132,001) (1,377,563) Income tax benefit............. - - - 500,300 500,300 ---------- ---------- --------- ---------- Loss before extraordinary item. (1,414,367) (1,363,222) (132,001) (877,263) Extraordinary item - loss on early extinguishment of debt, net of tax................... - (13,408) - (13,408) ---------- ---------- --------- ---------- Net loss................... $(1,414,367) $(1,376,630) $ (132,001) $ (890,671) ========== ========== ========= ==========
67 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 NOTE R. Subsequent Events Senior note issuance. During January 1998, the Company completed the issuance of the following two series of senior notes for total net proceeds of $593 million. The proceeds were used primarily to repay the Company's bank indebtedness. 6.5% senior notes due 2008. $350 million aggregate principal amount 6.5% senior notes dated January 13, 1998, due January 15, 2008. Interest on the 6.5% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. 7.2% senior notes due 2028. $250 million aggregate principal amount 7.2% senior notes dated January 13, 1998, due July 15, 2028. Interest on the 7.2% senior notes is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 1998. Both senior note issuances are governed by an Indenture between the Company and The Bank of New York dated January 13, 1998. Both senior note issuances are general unsecured obligations of the Company ranking equally in right of payment with all other senior unsecured indebtedness of the Company and are senior in right of payment to all existing and future subordinated indebtedness of the Company. In addition, the Company is a holding company that conducts all its operations through subsidiaries, and the senior notes are structurally subordinated to all obligations of its subsidiaries. Pioneer USA has fully and unconditionally guaranteed both senior note issuances. Reorganization. The Company plans to sell certain nonstrategic fields for estimated proceeds of $375 to $550 million during the latter part of 1998. These domestic fields generate only 15% of the Company's total cash flow. The proceeds will be used to reduce the Company's outstanding indebtedness and to fund the Company's capital expenditures program. Coincidentally with the property divestiture program, the Company has announced its intentions to reorganize its operations by combining the six domestic operating regions created by the merger between Parker & Parsley and Mesa into three geographic regions: the Permian Basin region, the MidContinent region and the onshore and offshore Gulf Coast region. The Company anticipates that it will incur nonrecurring expenditures of approximately $20 million during 1998 as a result of this reorganization. 68 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995 Capitalized Costs December 31, ------------------------ 1997 1996 ---------- ---------- (in thousands) Oil and Gas Properties: Proved $3,575,971 $1,419,051 Unproved 545,074 7,331 --------- --------- 4,121,045 1,426,382 Less accumulated depletion (605,203) (424,594) --------- --------- Net capitalized costs for oil and gas properties $3,515,842 $1,001,788 ========= ========= Costs Incurred for Oil and Gas Producing Activities
Property Acquisition Costs Total ----------------------- Exploration Development Costs Proved Unproved Costs Costs Incurred ---------- ---------- ----------- ----------- ---------- (in thousands) Year ended December 31, 1997: United States $2,623,993 $ 91,373 $ 88,710 $ 243,119 $3,047,195 Argentina 430,607 252,343 1,822 3,927 688,699 Canada 287,787 194,067 - - 481,854 Other foreign (a) - 332 5,442 - 5,774 --------- --------- -------- -------- --------- Total costs incurred $3,342,387 $ 538,115 $ 95,974 $ 247,046 $4,223,522 ========= ========= ======== ======== ========= Year ended December 31, 1996: United States $ 15,699 $ 5,255 $ 31,568 $ 168,553 $ 221,075 Foreign (b) 18 - 7,240 4,659 11,917 --------- --------- -------- -------- --------- Total costs incurred $ 15,717 $ 5,255 $ 38,808 $ 173,212 $ 232,992 ========= ========= ======== ======== ========= Year ended December 31, 1995: United States $ 46,796 $ - $ 8,062 $ 130,461 $ 185,319 Australia and Other Foreign 1,698 - 21,129 10,877 33,704 --------- --------- -------- -------- --------- Total costs incurred $ 48,494 $ - $ 29,191 $ 141,338 $ 219,023 ========= ========= ======== ======== =========
- --------------- (a) Primarily relates to an unsuccessful well in Guatemala. (b) Includes $7.4 million of expenditures related to the Company's Australian properties prior to their sale in 1996. The remainder relates to the Company's interests in Argentine properties. 69 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995 Results of Operations For the year ended December 31, ------------------------------------- 1997 1996 1995 ----------- ---------- ---------- (in thousands) UNITED STATES Oil and gas revenues $ 533,865 $ 385,198 $ 329,915 Production costs (143,332) (106,898) (118,487) Exploration and abandonments (31,909) (9,222) (6,795) Geological and geophysical (37,987) (7,042) (2,302) Depletion (203,160) (98,655) (125,165) Impairment of oil and gas properties (1,356,390) - (129,745) ----------- --------- --------- (1,238,913) 163,381 (52,579) Income tax benefit (provision) (a) 458,397 (57,183) 18,403 ---------- --------- --------- Results of operations for oil and gas producing activities $ (780,516) $ 106,198 $ (34,176) ========== ========= ========= AUSTRALIA AND OTHER FOREIGN (b) Oil and gas revenues $ - $ 10,591 $ 45,805 Production costs - (3,300) (12,418) Exploration and abandonments (5,442) (15) (6,779) Geological and geophysical - (1,420) (6,874) Depletion - (3,917) (20,303) ---------- --------- --------- (5,442) 1,939 (569) Income tax benefit (provision) (a) 1,905 (698) 205 ---------- --------- --------- Results of operations for oil and gas producing activities $ (3,537) $ 1,241 $ (364) ========== ========= ========= ARGENTINA Oil and gas revenues $ 2,917 $ 1,142 $ - Production costs (838) (136) - Exploration and abandonments (252) (3,416) (2,857) Geological and geophysical (1,570) (592) (1,945) Depletion (1,290) (231) - ---------- --------- - (1,033) (3,233) (4,802) Income tax benefit (a) 341 1,067 1,585 ---------- --------- --------- Results of operations for oil and gas producing activities $ (692) $ (2,166) $ (3,217) ========== ========= ========= TOTAL Oil and gas revenues $ 536,782 $ 396,931 $ 375,720 Production costs (144,170) (110,334) (130,905) Exploration and abandonments (37,603) (12,653) (16,431) Geological and geophysical (39,557) (9,054) (11,121) Depletion (204,450) (102,803) (145,468) Impairment of oil and gas properties (1,356,390) - (129,745) ----------- --- --------- (1,245,388) 162,087 (57,950) Income tax benefit (provision) (a) 460,643 (56,814) 20,193 ---------- ------- --------- Results of operations for oil and gas producing activities $ (784,745) $ 105,273 $ (37,757) ========== ======= ========= - --------------- (a) The income tax benefit (provision) is calculated using the current statutory tax rate for each jurisdiction. (b) 1997 amounts primarily relate to an unsuccessful well in Guatemala and the 1996 and 1995 amounts relate to the Company's Australian properties prior to their divestiture in March 1996. 70 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995 Reserve Quantity Information The estimates of the Company's proved oil and gas reserves, which are located principally in the United States, Argentina and Canada are prepared by the Company's engineers with respect to all properties other than Canada, which were prepared by Martin Petroleum & Associates and Gilbert Laustsen Jung Associates. Reserves were estimated in accordance with guidelines established by the SEC and the Financial Accounting Standards Board, which require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements. The reserve estimates for 1997 utilize an oil price of $16.89 per Bbl (reflecting adjustments for oil quality and gathering and transportation costs), an NGL price of $12.79 per Bbl and a gas price of $2.06 per Mcf (reflecting adjustments for BTU content, gathering and transportation costs and gas processing and shrinkage). Oil and gas reserve quantity estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. The accuracy of such estimates is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of subsequent drilling, testing and production may cause either upward or downward revision of previous estimates. Further, the volumes considered to be commercially recoverable fluctuate with changes in prices and operating costs. The Company emphasizes that reserve estimates are inherently imprecise and that estimates of new discoveries are more imprecise than those of currently producing oil and gas properties. Accordingly, these estimates are expected to change as additional information becomes available in the future. 71 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995
Oil and Gas Producing Activities: 1997 1996 1995 --------------------------- ------------------------- ------------------------- Oil Oil Oil & NGLs Gas & NGLs Gas & NGLs Gas Total Proved Reserves: (Bbls) (Mcf) BOE (Bbls) (Mcf) BOE (Bbls) (Mcf) BOE ------- --------- ------- ------- -------- ------- ------- ------- ------- UNITED STATES Balance, January 1 162,836 828,268 300,881 134,891 778,609 264,659 131,736 723,078 252,249 Revisions of previous estimates 70,063 (100,755) 53,271 42,614 151,095 67,797 27,697 142,516 51,449 Purchases of minerals-in-place 121,286 1,147,921 312,606 300 11,494 2,216 4,309 82,713 18,094 New discoveries and extensions 1,109 7,659 2,385 760 17,607 3,694 761 6,015 1,764 Production (17,737) (104,868) (35,215) (10,872) (73,924) (23,193) (11,328) (76,669) (24,106) Sales of minerals-in-place (8,241) (59,095) (18,090) (4,857) (56,613) (14,292) (18,284) (99,044) (34,791) ------- --------- ------- ------- -------- ------- ------- ------- ------- Balance, December 31 329,316 1,719,130 615,838 162,836 828,268 300,881 134,891 778,609 264,659 CANADA Balance, January 1 - - - - - - - - - Revisions of previous estimates - - - - - - - - - Purchases of minerals-in-place 22,796 207,868 57,441 - - - - - - New discoveries and extensions - - - - - - - - - Production - - - - - - - - - Sales of minerals-in-place - - - - - - - - - ------- --------- ------- ------- -------- ------- ------- ------- ------- Balance, December 31 22,796 207,868 57,441 - - - - - - AUSTRALIA Balance, January 1 - - - 12,443 118,297 32,159 12,805 104,430 30,210 Revisions of previous estimates - - - - - - 1,212 22,493 4,961 Purchases of minerals-in-place - - - - - - - - - New discoveries and extensions - - - - - - - - - Production - - - (349) (1,927) (669) (1,574) (8,626) (3,012) Sales of minerals-in-place - - - (12,094) (116,370) (31,490) - - - ------- --------- ------- ------- -------- ------- ------- ------- ------- Balance, December 31 - - - - - - 12,443 118,297 32,159 ARGENTINA Balance, January 1 1,105 1,108 1,290 - - - - - - Revisions of previous estimates (259) (1,108) (444) - - - - - - Purchases of minerals-in-place 30,914 340,392 87,646 - - - - - - New discoveries and extensions - - - 1,159 1,108 1,344 - - - Production (148) - (148) (54) - (54) - - - Sales of minerals-in-place - - - - - - - - - ------- --------- ------- ------- -------- ------- ------- ------- ------- Balance, December 31 31,612 340,392 88,344 1,105 1,108 1,290 - - - TOTAL Balance, January 1 163,941 829,376 302,171 147,334 896,906 296,818 144,541 827,508 282,459 Revisions of previous estimates 69,804 (101,863) 52,827 42,614 151,095 67,797 28,909 165,009 56,410 Purchases of minerals-in-place 174,996 1,696,181 457,693 300 11,494 2,216 4,309 82,713 18,094 New discoveries and extensions 1,109 7,659 2,385 1,919 18,715 5,038 761 6,015 1,764 Production (17,885) (104,868) (35,363) (11,275) (75,851) (23,916) (12,902) (85,295) (27,118) Sales of minerals-in-place (8,241) (59,095) (18,090) (16,951) (172,983) (45,782) (18,284) (99,044) (34,791) ------- --------- ------- ------- -------- ------- ------- ------- ------- Balance, December 31 383,724 2,267,390 761,623 163,941 829,376 302,171 147,334 896,906 296,818 ======= ========= ======= ======= ======== ======= ======= ======= ======= Proved Developed Reserves: January 1 126,370 660,174 236,399 108,920 646,066 216,598 107,068 622,775 210,864 ======= ========= ======= ======= ======== ======= ======= ======= ======= December 31 329,920 1,956,658 656,030 126,370 660,174 236,399 108,920 646,066 216,598 ======= ========= ======= ======= ======== ======= ======= ======= =======
72 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995 Standardized Measure of Discounted Future Net Cash Flows The standardized measure of discounted future net cash flows is computed by applying year-end prices of oil and gas (with consideration of price changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves less estimated future expenditures (based on year-end costs) to be incurred in developing and producing the proved reserves, discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows. Future income taxes are calculated by comparing discounted future cash flows to the tax basis of oil and gas properties plus available carryforwards and credits and applying the current tax rates to the difference. Discounted future cash flow estimates like those shown below are not intended to represent estimates of the fair value of oil and gas properties. Estimates of fair value should also consider probable reserves, anticipated future oil and gas prices, interest rates, changes in development and production costs and risks associated with future production. Because of these and other considerations, any estimate of fair value is necessarily subjective and imprecise. 73 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995
For the year ended December 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (in thousands) UNITED STATES Oil and gas producing activities: Future cash inflows $ 8,936,044 $ 7,280,710 $ 4,134,327 Future production costs (3,185,357) (2,325,274) (1,618,191) Future development costs (325,659) (196,410) (164,794) Future income tax expense (860,632) (1,385,399) (523,755) ---------- ---------- ---------- 4,564,396 3,373,627 1,827,587 10% annual discount factor (2,067,371) (1,574,103) (727,743) ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ 2,497,025 $ 1,799,524 $ 1,099,844 ========== ========== ========== ARGENTINA Oil and gas producing activities: Future cash inflows $ 912,688 $ 28,211 $ - Future production costs (168,105) (8,099) - Future development costs (137,060) (4,456) - Future income tax expense (60,069) - - ---------- ---------- ---------- 547,454 15,656 - 10% annual discount factor (201,732) (7,615) - ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ 345,722 $ 8,041 $ - ========== ========== ========== CANADA Oil and gas producing activities: Future cash inflows $ 662,104 $ - $ - Future production costs (223,325) - - Future development costs (48,323) - - Future income tax expense (79,044) - - ---------- ---------- ---------- 311,412 - - 10% annual discount factor (102,395) - - ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ 209,017 $ - $ - ========== ========== ========== AUSTRALIA Oil and gas producing activities: Future cash inflows $ - $ - $ 428,191 Future production costs - - (136,681) Future development costs - - (47,085) Future income tax expense - - (69,649) ---------- ---------- ---------- - - 174,776 10% annual discount factor - - (70,831) ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ - $ - $ 103,945 ========== ========== ========== TOTAL Oil and gas producing activities: Future cash inflows $10,510,836 $ 7,308,921 $ 4,562,518 Future production costs (3,576,787) (2,333,373) (1,754,872) Future development costs (511,042) (200,866) (211,879) Future income tax expense (999,745) (1,385,399) (593,404) ---------- ---------- ---------- 5,423,262 3,389,283 2,002,363 10% annual discount factor (2,371,498) (1,581,718) (798,574) ---------- ---------- ---------- Standardized measure of discounted future net cash flows $ 3,051,764 $ 1,807,565 $ 1,203,789 ========== ========== ==========
74 PIONEER NATURAL RESOURCES COMPANY UNAUDITED SUPPLEMENTARY INFORMATION Years ended December 31, 1997, 1996 and 1995
Year ended December 31, --------------------------------------- 1997 1996 1995 ----------- ---------- ---------- (in thousands) Oil and Gas Producing Activities: Oil and gas sales, net of production costs $ (392,612) $ (286,597) $ (244,815) Net changes in prices and production costs (1,034,678) 866,196 221,581 Extensions and discoveries 19,993 53,314 12,321 Sales of minerals-in-place (126,879) (185,859) (139,250) Purchases of minerals-in-place 1,880,570 20,606 53,628 Revisions of estimated future development costs (15,158) (73,587) (47,459) Revisions of previous quantity estimates and reserves added by development drilling 240,375 569,529 288,445 Accretion of discount 234,537 123,174 105,891 Changes in production rates, timing and other (99,753) (106,896) (3,496) ---------- --------- --------- Change in present value of future net revenues 706,395 979,880 246,846 Net change in present value of future income taxes 537,804 (376,104) (114,714) ---------- --------- --------- 1,244,199 603,776 132,132 Balance, beginning of year 1,807,565 1,203,789 1,071,657 ---------- --------- --------- Balance, end of year $ 3,051,764 $1,807,565 $1,203,789 ========== ========= =========
Selected Quarterly Financial Results Quarter ------------------------------------------ First Second Third Fourth -------- -------- -------- --------- (in thousands, except per share data) 1997 Operating revenues $103,779 $ 94,847 $150,354 $ 187,802 Total revenues 106,707 97,389 151,278 190,655 Costs and expenses 77,994 85,576 168,326 1,591,696 Income (loss) before extraordinary item 18,613 7,413 (11,048) (892,241) Net income (loss) 18,613 7,413 (12,566) (904,131) Income (loss) before extraordinary item per share .53 .21 (.18) (11.43) Net income (loss) per share .53 .21 (.21) (11.58) 1996 Operating revenues $103,444 $ 99,674 $ 97,019 $ 120,608 Total revenues 118,282 182,508 111,230 123,323 Costs and expenses 91,272 82,952 74,765 86,006 Net income 14,710 80,156 20,965 24,417 Net income per share .41 2.24 .59 .69 75 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE At a meeting held on December 5, 1997, the Board of Directors of the Company approved the engagement of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 1998 to replace the firm of KPMG Peat Marwick LLP, who were dismissed as auditors of the Company after completing the audit of the Company for the fiscal year ending December 31, 1997. The audit committee of the Board of Directors approved the change in auditors on December 5, 1997, subject to ratification by the Company's stockholders. The audit of the Company for the fiscal year ended December 31, 1997 was completed on February 13, 1998. The reports of KPMG Peat Marwick LLP on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company's financial statements for each of the two fiscal years ended December 31, 1997 and 1996, there were no disagreements with KPMG Peat Marwick LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of KPMG Peat Marwick LLP would have caused KPMG Peat Marwick LLP to make reference to the matter in their report. The Company has received from KPMG Peat Marwick LLP a letter addressed to the Securities and Exchange Commission stating that KPMG Peat Marwick LLP agrees with the above statements. A copy of the letter is included as Exhibit 16.1 to this Form 10-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1998 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1998 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1998 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this item is set forth in the Company's definitive proxy statement for the annual meeting of stockholders to be held in 1998 and is incorporated herein by reference. 76 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Listing of Financial Statements and Exhibits Financial Statements The following consolidated financial statements of the Company are included in "Item 8. Financial Statements and Supplementary Data": Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Unaudited Supplementary Information All other statements and schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not required under related instructions or are inapplicable, or the information is shown in the financial statements and related notes. Exhibits Exhibit Number Description 2.1 - Amended and Restated Agreement and Plan of Merger, dated as of April 6, 1997, by and among Mesa, Mesa Operating Co. ("MOC"), MXP Reincorporation Corp. and Parker & Parsley (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 3.1 - Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333- 26951). 3.2 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 3.3 - Certificate of Designations of Special Preferred Voting Stock (incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-3, Registration No. 333-42315, filed with the SEC on December 17, 1997). 3.4 - Terms and Conditions of Exchangeable Shares (incorporated by reference to Annex F to the Definitive Joint Management Information Circular and Proxy Statement of the Company and Chauvco, File No. 001- 13245, filed with the SEC on November 17, 1997). 4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 4.2 - Form of Certificate of Special Preferred Voting Stock (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 4.3 - Form of Certificate of Exchangeable Shares (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 77 Exhibit Number Description 9.1 - Shareholder Agreement, dated as of April 6, 1997, between Mesa, Boone Pickens and Parker & Parsley (incorporated by reference to Exhibit 2.4 to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997). 9.2 - Shareholders Agreement, dated as of April 6, 1997, between DNR-Mesa Holdings, L.P. ("DNR") and Mesa (incorporated by reference to Exhibit 2.2 to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997). 9.3 - Voting and Exchange Trust Agreement, dated as of December 18, 1997, among the Company, Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada") and Montreal Trust Company of Canada, as Trustee (incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 9.4 - Amended and Restated Shareholders Agreement, dated as of September 3, 1997, by and between the Company and Guy J. Turcotte (incorporated by reference to Exhibit 2.6 to the Company's Registration Statement on Form S-3, Registration No. 333-42315, filed with the SEC on December 15, 1997). 9.5 - Shareholders Agreement, dated as of September 3, 1997, by and among the Company, Chauvco, DNR, Scott D. Sheffield and I. Jon Brumley (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 9.6 - Shareholders Agreement, dated as of September 3, 1997, by and among the Company, Trimac Corporation and Gendis Inc. (incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 10.1 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as Trustee, relating to the 115/8% Senior Subordinated Discount Notes Due 2006 (incorporated by reference to Exhibit 4.17 to Mesa's Quarterly Report on Form 10-Q for the period ended June 30, 1996). 10.2 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.3 - Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.4 - Third Supplemental Indenture, dated as of December 18, 1997, among Pioneer USA, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.5 - Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA (formerly MOC), a Delaware corporation, the Company, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.13 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 78 Exhibit Number Description 10.6 - Fifth Supplemental Indenture, dated as of December 30, 1997, among Pioneer NewSub1, Inc. (as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer DebtCo., Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.14 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.7 - Sixth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo. Inc. (as successor to Pioneer NewSub1, Inc.), a Texas corporation, the Company, a Delaware corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.15 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.8 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as Issuer, the Company (Mesa's successor), as Guarantor, and Harris Trust and Savings Bank, as Trustee, relating to the 105/8% Senior Subordinated Notes Due 2006 (incorporated by reference to Exhibit 4.18 to Mesa's Quarterly Report on Form 10-Q for the period ended June 30, 1996). 10.9 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.10- Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.11- Third Supplemental Indenture, dated as of December 18, 1997, among Pioneer USA, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.12- Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA, a Delaware corporation, the Company, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.13- Fifth Supplemental Indenture, dated as of December 30, 1997, among Pioneer NewSub 1, Inc. (as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer DebtCo, Inc, a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.14- Sixth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc.), a Texas corporation, the Company, a Delaware corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.9 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 79 Exhibit Number Description 10.15- Indentures relating to $50,000,000 principal amount of 8 1/2% Convertible Subordinated Debentures due 2005 of Dorchester Master Limited Partnership ($2,143,000 principal amount of which were outstanding and held by non affiliates at December 31, 1997) and $100,000,000 principal amount of 9 1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000 principal amount of which were outstanding at December 31, 1997) have been omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of the indentures to the SEC upon request (incorporated by reference to Parker & Parsley's Annual Report on Form 10-K for the period ended December 31, 1996, file No. 1-10695). 10.16- Indenture, dated April 12, 1995, between Pioneer USA (successor to Parker & Parsley), and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4.1 to Parker & Parsley's Current Report on Form 8-K, dated April 12, 1995, File No. 1-10695). 10.17- First Supplemental Indenture, dated as of August 7, 1997, among Parker & Parsley, The Chase Manhattan Bank, as Trustee, and Pioneer USA, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.18- Second Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and The Chase Manhattan Bank, a New York banking association, as Trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.17 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.19- Third Supplemental Indenture, dated as of December 30, 1997, among Pioneer New Sub1, Inc. (as successor to Pioneer USA), a Texas corporation, Pioneer DebtCo, Inc., a Texas corporation, and The Chase Manhattan Bank, a New York banking association, as Trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.18 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.20- Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc., as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer USA, a Delaware corporation, and The Chase Manhattan Bank, a New York banking association, as trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.21- Guarantee, dated as of December 30, 1997, by Pioneer USA relating to the $150,000,000 in aggregate principal amount of 87/8% Senior Notes due 2005 and $150,000,000 in aggregate principal amount of 8 1/4% Senior Notes due 2007 issued under the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.20 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.22- Form of 87/8% Senior Notes Due 2005, dated as of April 12, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated April 12, 1995, establishing the terms of the 87/8% Senior Notes Due 2005 pursuant to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 4.2 to Parker & Parsley's Quarterly Report on Form 10-Q for the period ended June 30, 1995, File No. 1-10695). 10.23- Form of 8 1/4% Senior Notes due 2007, dated as of August 22, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated August 22, 1995, establishing the terms of the 8 1/4% Senior Notes due 2007 pursuant to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 1.2 to Parker & Parsley's Current Report on Form 8-K, dated August 17, 1995, File No. 1-10695). 80 Exhibit Number Description 10.24- Indenture, dated January 13, 1998, between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 99.1 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.25- First Supplemental Indenture, dated as of January 13, 1998, among the Company, Pioneer USA, as the Subsidiary Guarantor, and The Bank of New York, as Trustee, with respect to the indenture identified above as Exhibit 10.24 (incorporated by reference to Exhibit 99.2 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.26- Form of 6.50% Senior Notes Due 2008 of the Company (incorporated by reference to Exhibit 99.3 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.27- Form of 7.20% Senior Notes Due 2028 of the Company (incorporated by reference to Exhibit 99.4 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.28- Guarantee (2008 Notes), dated as of January 13, 1998, entered into by Pioneer USA (incorporated by reference to Exhibit 99.5 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 14, 1998). 10.29- Guarantee (2028 Notes), dated as of January 13, 1998, entered into by Pioneer USA (incorporated by reference to Exhibit 99.6 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 14, 1998). 10.30- Amended and Restated Credit Facility Agreement (Primary Facility), dated as of December 18, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.31- Amended and Restated Credit Facility Agreement (364 Day Facility), dated as of December 18, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and lenders named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.32- Credit Agreement, dated as of December 18, 1997, among Chauvco, Canadian Imperial Bank of Commerce, as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.33- Note, dated December 22, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Lender (incorporated by reference to Exhibit 10.21 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.34+ - 1991 Stock Option Plan of Mesa (incorporated by reference to Exhibit 10(v) to Mesa's Annual Report on Form 10-K for the period ended December 31, 1991). 10.35+ - 1996 Incentive Plan of Mesa (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 10.36+ - Parker & Parsley Long-Term Incentive Plan, dated February 19, 1991 (incorporated by reference to Exhibit 4.1 to Parker & Parsley's Registration Statement on Form S-8, Registration No. 33-38971). 81 Exhibit Number Description 10.37+ - First Amendment to the Parker & Parsley Long-Term Incentive Plan, dated August 23, 1991 (incorporated by reference to Exhibit 10.2 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.38+ - The Company's Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-35087). 10.39+ - The Company's Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-35165). 10.40+ - The Company's Deferred Compensation Retirement Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333- 39153). 10.41+ - Pioneer USA 401(k) Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-39249). 10.42+*- Pioneer USA Matching Plan. 10.43+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as part of the Parker & Parsley Long-Term Incentive Plan, dated as of November 16, 1995, between Parker & Parsley and Named Executive Officers identified on Schedule 1 setting forth additional details relating to the Parker & Parsley Long-Term Incentive Plan (incorporated by reference to Parker & Parsley's Annual Report on Form 10-K for the period ended December 31, 1995, Commission File No. 1-10695). 10.44+ - Employment Agreement, dated as of August 21, 1996, between Mesa and I. Jon Brumley (incorporated by reference to Exhibit 10.26 to Mesa's Annual Report on Form 10-K for the period ended December 31, 1996). 10.45+ - Mesa Management Severance Plan, dated April 4, 1997, including a Schedule of Participants on Schedule A for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 10.46+ - Severance Agreement, dated as of August 8, 1997, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the other named executive officers identified on Schedule I for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.47+ - Indemnification Agreement, dated as of August 8, 1997, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements the Company and each of the Company's other directors and named executive officers identified on Schedule I (incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.48+ - Stock Acquisition Loan Agreement entered into as of June 15, 1995, between Parker & Parsley and Scott D. Sheffield, together with Schedule I identifying named executive officers with substantially identical agreements, providing for Parker & Parsley's loans to such officers of the amounts respectively identified on Schedule I thereto, for the purpose of acquiring Parker & Parsley's Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-3, Registration No. 333-39381, filed with the SEC on December 17, 1997). 82 Exhibit Number Description 10.49- Purchase and Sale Agreement, dated as of October 22, 1997, between Cometra Energy, L.P., and Pioneer USA (incorporated by reference to Exhibit 10.22 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.50- Combination Agreement, dated September 3, 1997, between the Company and Chauvco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 10.51- Plan of Arrangement, as amended, under Section 186 of the Business Corporations Act (Alberta) (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.52- Support Agreement, dated as of December 18, 1997, between the Company and Pioneer Canada (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.53- Stock Purchase Agreement, dated April 26, 1996, between Mesa and DNR (incorporated by reference to Exhibit No. 10 to Mesa's Current Report on Form 8-K filed with the SEC on April 29, 1996). 10.54- "B" Contract Production Allocation Agreement, dated July 29, 1991, and effective as of January 1, 1991, between Colorado Interstate Gas Company and Mesa Operating Limited Partnership (incorporated by reference to Exhibit 10(r) to Mesa's Annual Report on Form 10-K for the period ended December 31, 1991). 10.55- Amendment to "B" Contract Production Allocation Agreement effective as of January 1, 1993, between Colorado Interstate Gas Company and Mesa Operating Limited Partnership (incorporated by reference to Exhibit 10.24 to Mesa's Registration Statement on Form S-1, Registration No. 33-51909). 10.56- Amarillo Supply Agreement between Mesa Operating Limited Partnership, Seller, and Energas Company, a division of Atmos Energy Corporation, Buyer, dated effective January 2, 1993 (incorporated by reference to Exhibit 10.14 to Mesa's Annual Report on Form 10-K for the period ended December 31, 1995). 10.57+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.50 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33-38436). 10.58+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executives officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ form the foregoing document (incorporated by reference to Exhibit 10.51 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33-38436). 10.59+ - Schedule identifying additional documents substantially identical to the Amendment to Agreement of Partnership of P&P Employees 89-B GP included as Exhibit 10.58 and setting forth the material details in which those documents differ from that document (incorporated by reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 83 Exhibit Number Description 10.60+ - Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), and form of Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33- 38436). 10.61+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP, dated February 19, 1991, among Parker & Parsley Development Company and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.58 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.62+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30, 1991, among Parker & Parsley Development Company, James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.61 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.63+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated April 22, 1991, among the Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley) (incorporated by reference to Exhibit 10.67 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 11.1* - Statement of Computation of Earnings per Share 16.1* - Change in Certifying Accountant 21.1* - Subsidiaries of the registrant. 23.1* - Consent of KPMG Peat Marwick LLP 27.1* - Financial Data Schedule - --------------- * Filed herewith + Executive Compensation Plan or Arrangement previously filed pursuant to Item 14(c). Reports on Form 8-K During the quarter ended December 31, 1997, Pioneer filed the following Current Reports on Form 8-K: (1) On December 23, 1997, the Company filed a Current Report on Form 8-K/A dated December 5, 1997 reporting (a) under Item 4 (Other Events) the approval by the Company's Board of Directors of the engagement of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 1998 to replace the firm of KPMG Peat Marwick LLP and (b) under Item 7 (Financial Statements and Exhibits) the letter from KPMG Peat Marwick LLP addressed to the Securities and Exchange Commission in connection with the audits of the Company's financial statements. (2) On December 12, 1997, the Company filed a Current Report on Form 8-K dated December 5, 1997 reporting under Item 4 (Other Events) the approval by the Company's Board of Directors of the engagement of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 1998. Ernst & Young LLP will replace the firm of KPMG Peat Marwick LLP, who will be dismissed as auditors of the Company after completing the audit of the Company for the fiscal year ending December 31, 1997. (3) On October 2, 1997, the Company filed a Current Report on Form 8-K dated September 3, 1997 reporting under Item 5 (Other Events) the signing of a Combination Agreement with Chauvco and under Item 7 (Financial Statements and Exhibits) various documents related to such business combination. Exhibits The exhibits to this Report required to be filed pursuant to Item 14(c) are listed under "Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - Listing of Financial Statements and Exhibits - Exhibits" above and in the "Index to Exhibits" attached hereto. Financial Statement Schedules No financial statement schedules are required to be filed as part of this Report or are inapplicable. 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PIONEER NATURAL RESOURCES COMPANY Date: March 18, 1998 By: /s/ Scott D. Sheffield ---------------------------------- Scott D. Sheffield, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Scott D. Sheffield President, Chief Executive March 18, 1998 - ----------------------------- Officer and Director (principal Scott D. Sheffield executive officer) /s/ M. Garrett Smith Executive Vice President and March 18, 1998 - ----------------------------- Chief Financial Officer M. Garrett Smith /s/ Rich Dealy Vice President and Chief March 18, 1998 - ----------------------------- Accounting Officer Rich Dealy /s/ I. Jon Brumley Chairman of the Board March 18, 1998 - ----------------------------- I. Jon Brumley /s/ James R. Baroffio Director March 18, 1998 - ----------------------------- James R. Baroffio /s/ R. Hartwell Gardner Director March 18, 1998 - ----------------------------- R. Hartwell Gardner /s/ John S. Herrington Director March 18, 1998 - ----------------------------- John S. Herrington /s/ Kenneth A. Hersh Director March 18, 1998 - ----------------------------- Kenneth A. Hersh /s/ James L. Houghton Director March 18, 1998 - ----------------------------- James L. Houghton /s/ Jerry P. Jones Director March 18, 1998 - ----------------------------- Jerry P. Jones 85 Signature Title Date /s/ T. Boone Pickens Director March 18, 1998 - -------------------------------------- T. Boone Pickens /s/ Richard E. Rainwater Director March 18, 1998 - -------------------------------------- Richard E. Rainwater /s/ Charles E. Ramsey, Jr. Director March 18, 1998 - -------------------------------------- Charles E. Ramsey, Jr. /s/ Arthur L. Smith Director March 18, 1998 - -------------------------------------- Arthur L. Smith /s/ Philip B. Smith Director March 18, 1998 - -------------------------------------- Philip B. Smith /s/ Robert L. Stillwell Director March 18, 1998 - -------------------------------------- Robert L. Stillwell /s/ Michael D. Wortley Director March 18, 1998 - -------------------------------------- Michael D. Wortley 86 INDEX TO EXHIBITS Exhibit Number Description 2.1 - Amended and Restated Agreement and Plan of Merger, dated as of April 6, 1997, by and among Mesa, Mesa Operating Co. ("MOC"), MXP Reincorporation Corp. and Parker & Parsley (incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 3.1 - Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 3.2 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 3.3 - Certificate of Designations of Special Preferred Voting Stock (incorporated by reference to Exhibit 3.3 of the Company's Registration Statement on Form S-3, Registration No. 333-42315, filed with the SEC on December 17, 1997). 3.4 - Terms and Conditions of Exchangeable Shares (incorporated by reference to Annex F to the Definitive Joint Management Information Circular and Proxy Statement of the Company and Chauvco, File No. 001-13245, filed with the SEC on November 17, 1997). 4.1 - Form of Certificate of Common Stock, par value $.01 per share, of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 4.2 - Form of Certificate of Special Preferred Voting Stock (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 4.3 - Form of Certificate of Exchangeable Shares (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 9.1 - Shareholder Agreement, dated as of April 6, 1997, between Mesa, Boone Pickens and Parker & Parsley (incorporated by reference to Exhibit 2.4 to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997). 9.2 - Shareholders Agreement, dated as of April 6, 1997, between DNR-Mesa Holdings, L.P. ("DNR") and Mesa (incorporated by reference to Exhibit 2.2 to Mesa's Current Report on Form 8-K filed with the SEC on April 8, 1997). 9.3 - Voting and Exchange Trust Agreement, dated as of December 18, 1997, among the Company, Pioneer Natural Resources (Canada) Ltd. ("Pioneer Canada") and Montreal Trust Company of Canada, as Trustee (incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 87 Exhibit Number Description 9.4 - Amended and Restated Shareholders Agreement, dated as of September 3, 1997, by and between the Company and Guy J. Turcotte (incorporated by reference to Exhibit 2.6 to the Company's Registration Statement on Form S-3, Registration No. 333-42315, filed with the SEC on December 15, 1997). 9.5 - Shareholders Agreement, dated as of September 3, 1997, by and among the Company, Chauvco, DNR, Scott D. Sheffield and I. Jon Brumley (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 9.6 - Shareholders Agreement, dated as of September 3, 1997, by and among the Company, Trimac Corporation and Gendis Inc. (incorporated by reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 10.1 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as Trustee, relating to the 115/8% Senior Subordinated Discount Notes Due 2006 (incorporated by reference to Exhibit 4.17 to Mesa's Quarterly Report on Form 10-Q for the period ended June 30, 1996). 10.2 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.3 - Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the subsidiary guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.4 - Third Supplemental Indenture, dated as of December 18, 1997, among Pioneer USA, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.12 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.5 - Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA (formerly MOC), a Delaware corporation, the Company, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.13 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.6 - Fifth Supplemental Indenture, dated as of December 30, 1997, among Pioneer NewSub1, Inc. (as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer DebtCo., Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.14 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 88 Exhibit Number Description 10.7 - Sixth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo. Inc. (as successor to Pioneer NewSub1, Inc.), a Texas corporation, the Company, a Delaware corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.1 (incorporated by reference to Exhibit 10.15 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.8 - Indenture, dated July 2, 1996, among Pioneer USA (formerly MOC), as Issuer, the Company, as Guarantor, and Harris Trust and Savings Bank, as Trustee, relating to the 105/8% Senior Subordinated Notes Due 2006 (incorporated by reference to Exhibit 4.18 to Mesa's Quarterly Report on Form 10-Q for the period ended June 30, 1996). 10.9 - First Supplemental Indenture, dated as of April 15, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.10- Second Supplemental Indenture, dated as of August 7, 1997, among Pioneer USA (formerly MOC), as Issuer, Mesa, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.11- Third Supplemental Indenture, dated as of December 18, 1997, among Pioneer USA, the Subsidiary Guarantors named therein, the Company, and Harris Trust and Savings Bank, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form 8- K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.12- Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA, a Delaware corporation, the Company, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.13- Fifth Supplemental Indenture, dated as of December 30, 1997, among Pioneer NewSub 1, Inc. (as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer DebtCo, Inc, a Texas corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.14- Sixth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc.), a Texas corporation, the Company, a Delaware corporation, and Harris Trust and Savings Bank, an Illinois corporation, as Trustee, with respect to the indenture identified above as Exhibit 10.8 (incorporated by reference to Exhibit 10.9 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 89 Exhibit Number Description 10.15- Indentures relating to $50,000,000 principal amount of 8 1/2% Convertible Subordinated Debentures due 2005 of Dorchester Master Limited Partnership ($2,143,000 principal amount of which were outstanding and held by non affiliates at December 31, 1997) and $100,000,000 principal amount of 9 1/2% Senior Notes due 2000 of Bridge Oil (U.S.A.) Inc. ($2,063,000 principal amount of which were outstanding at December 31, 1997) have been omitted pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of the indentures to the SEC upon request (incorporated by reference to Parker & Parsley's Annual Report on Form 10-K for the period ended December 31, 1996, file No. 1-10695). 10.16- Indenture, dated April 12, 1995, between Pioneer USA (successor to Parker & Parsley), and The Chase Manhattan Bank (National Association), as Trustee (incorporated by reference to Exhibit 4.1 to Parker & Parsley's Current Report on Form 8-K, dated April 12, 1995, File No. 1-10695). 10.17- First Supplemental Indenture, dated as of August 7, 1997, among Parker & Parsley, The Chase Manhattan Bank, as Trustee, and Pioneer USA, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.18- Second Supplemental Indenture, dated as of December 30, 1997, among Pioneer USA, a Delaware corporation, Pioneer NewSub1, Inc., a Texas corporation, and The Chase Manhattan Bank, a New York banking association, as Trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.17 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.19- Third Supplemental Indenture, dated as of December 30, 1997, among Pioneer New Sub1, Inc. (as successor to Pioneer USA), a Texas corporation, Pioneer DebtCo, Inc., a Texas corporation, and The Chase Manhattan Bank, a New York banking association, as Trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.18 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.20- Fourth Supplemental Indenture, dated as of December 30, 1997, among Pioneer DebtCo, Inc. (as successor to Pioneer NewSub1, Inc., as successor to Pioneer USA), a Texas corporation, the Company, a Delaware corporation, Pioneer USA, a Delaware corporation, and The Chase Manhattan Bank, a New York banking association, as trustee, with respect to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.19 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.21- Guarantee, dated as of December 30, 1997, by Pioneer USA relating to the $150,000,000 in aggregate principal amount of 87/8% Senior Notes due 2005 and $150,000,000 in aggregate principal amount of 8 1/4% Senior Notes due 2007 issued under the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 10.20 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 90 Exhibit Number Description 10.22- Form of 87/8% Senior Notes Due 2005, dated as of April 12, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated April 12, 1995, establishing the terms of the 87/8% Senior Notes Due 2005 pursuant to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 4.2 to Parker & Parsley's Quarterly Report on Form 10-Q for the period ended June 30, 1995, File No. 1-10695). 10.23- Form of 8 1/4% Senior Notes due 2007, dated as of August 22, 1995, in the aggregate principal amount of $150,000,000, together with Officers' Certificate dated August 22, 1995, establishing the terms of the 8 1/4% Senior Notes due 2007 pursuant to the indenture identified above as Exhibit 10.16 (incorporated by reference to Exhibit 1.2 to Parker & Parsley's Current Report on Form 8-K, dated August 17, 1995, File No. 1-10695). 10.24- Indenture, dated January 13, 1998, between the Company and The Bank of New York, as Trustee (incorporated by reference to Exhibit 99.1 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.25- First Supplemental Indenture, dated as of January 13, 1998, among the Company, Pioneer USA, as the Subsidiary Guarantor, and The Bank of New York, as Trustee, with respect to the indenture identified above as Exhibit 10.24 (incorporated by reference to Exhibit 99.2 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.26- Form of 6.50% Senior Notes Due 2008 of the Company (incorporated by reference to Exhibit 99.3 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.27- Form of 7.20% Senior Notes Due 2028 of the Company (incorporated by reference to Exhibit 99.4 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.28- Guarantee (2008 Notes), dated as of January 13, 1998, entered into by Pioneer USA (incorporated by reference to Exhibit 99.5 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.29- Guarantee (2028 Notes), dated as of January 13, 1998, entered into by Pioneer USA (incorporated by reference to Exhibit 99.6 to the Company's and Pioneer USA's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 14, 1998). 10.30- Amended and Restated Credit Facility Agreement (Primary Facility), dated as of December 18, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8- K, File No. 001-13245, filed with the SEC on January 2, 1998). 91 Exhibit Number Description 10.31- Amended and Restated Credit Facility Agreement (364 Day Facility), dated as of December 18, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Administrative Agent, CIBC Inc., as Documentation Agent, Morgan Guaranty Trust Company of New York, as Documentation Agent, and The Chase Manhattan Bank, as Syndication Agent; and the other Co-Agents and lenders named therein (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8- K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.32- Credit Agreement, dated as of December 18, 1997, among Chauvco, Canadian Imperial Bank of Commerce, as Agent, and the other Lenders named therein (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K, File No. 001- 13245, filed with the SEC on January 2, 1998). 10.33- Note, dated December 22, 1997, between the Company, as Borrower, and NationsBank of Texas, N.A., as Lender (incorporated by reference to Exhibit 10.21 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.34+ - 1991 Stock Option Plan of Mesa (incorporated by reference to Exhibit 10(v) to Mesa's Annual Report on Form 10-K for the period ended December 31, 1991). 10.35+ - 1996 Incentive Plan of Mesa (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 10.36+ - Parker & Parsley Long-Term Incentive Plan, dated February 19, 1991 (incorporated by reference to Exhibit 4.1 to Parker & Parsley's Registration Statement on Form S-8, Registration No. 33-38971). 10.37+ - First Amendment to the Parker & Parsley Long-Term Incentive Plan, dated August 23, 1991 (incorporated by reference to Exhibit 10.2 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.38+ - The Company's Long-Term Incentive Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-35087). 10.39+ - The Company's Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-35165). 10.40+ - The Company's Deferred Compensation Retirement Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333- 39153). 10.41+ - Pioneer USA 401(k) Plan (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-39249). 10.42+*- Pioneer USA Matching Plan. 92 Exhibit Number Description 10.43+ - Omnibus Amendment to Nonstatutory Stock Option Agreements, included as part of the Parker & Parsley Long-Term Incentive Plan, dated as of November 16, 1995, between Parker & Parsley and Named Executive Officers identified on Schedule 1 setting forth additional details relating to the Parker & Parsley Long-Term Incentive Plan (incorporated by reference to Parker & Parsley's Annual Report on Form 10-K for the period ended December 31, 1995, Commission File No. 1-10695). 10.44+ - Employment Agreement, dated as of August 21, 1996, between Mesa and I. Jon Brumley (incorporated by reference to Exhibit 10.26 to Mesa's Annual Report on Form 10-K for the period ended December 31, 1996). 10.45+ - Mesa Management Severance Plan, dated April 4, 1997, including a Schedule of Participants on Schedule A for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-4, dated June 27, 1997, Registration No. 333-26951). 10.46+ - Severance Agreement, dated as of August 8, 1997, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the other named executive officers identified on Schedule I for the purpose of defining the payment of certain benefits upon the termination of the officer's employment under certain circumstances (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.47+ - Indemnification Agreement, dated as of August 8, 1997, between the Company and Scott D. Sheffield, together with a schedule identifying substantially identical agreements between the Company and each of the Company's other directors and named executive officers identified on Schedule I (incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997, File No. 001-13245). 10.48+ - Stock Acquisition Loan Agreement entered into as of June 15, 1995, between Parker & Parsley and Scott D. Sheffield, together with Schedule I identifying named executive officers with substantially identical agreements, providing for Parker & Parsley's loans to such officers of the amounts respectively identified on Schedule I thereto, for the purpose of acquiring Parker & Parsley's Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 10.48 to the Company's Registration Statement on Form S-3, Registration No. 333-39381, filed with the SEC on December 17, 1997). 10.49- Purchase and Sale Agreement, dated as of October 22, 1997, between Cometra Energy, L.P., and Pioneer USA (incorporated by reference to Exhibit 10.22 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.50- Combination Agreement, dated September 3, 1997, between the Company and Chauvco (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on October 2, 1997). 93 Exhibit Number Description 10.51- Plan of Arrangement, as amended, under Section 186 of the Business Corporations Act (Alberta) (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.52- Support Agreement, dated as of December 18, 1997, between the Company and Pioneer Canada (incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on January 2, 1998). 10.53- Stock Purchase Agreement, dated April 26, 1996, between Mesa and DNR (incorporated by reference to Exhibit No. 10 to Mesa's Current Report on Form 8-K filed with the SEC on April 29, 1996). 10.54- "B" Contract Production Allocation Agreement, dated July 29, 1991, and effective as of January 1, 1991, between Colorado Interstate Gas Company and Mesa Operating Limited Partnership (incorporated by reference to Exhibit 10(r) to Mesa's Annual Report on Form 10-K for the period ended December 31, 1991). 10.55- Amendment to "B" Contract Production Allocation Agreement effective as of January 1, 1993, between Colorado Interstate Gas Company and Mesa Operating Limited Partnership (incorporated by reference to Exhibit 10.24 to Mesa's Registration Statement on Form S-1, Registration No. 33-51909). 10.56- Amarillo Supply Agreement between Mesa Operating Limited Partnership, Seller, and Energas Company, a division of Atmos Energy Corporation, Buyer, dated effective January 2, 1993 (incorporated by reference to Exhibit 10.14 to Mesa's Annual Report on Form 10-K for the period ended December 31, 1995). 10.57+ - Agreement of Partnership of P&P Employees 89-B Conv., L.P. (formerly P&P Employees 89-B GP), dated October 31, 1989, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.50 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33-38436). 10.58+ - Amendment to Agreement of Partnership of P&P Employees 89-B GP, dated May 31, 1990, among Parker & Parsley, Ltd. and the Investor Partners (as defined therein, which includes individuals who are directors and executives officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ form the foregoing document (incorporated by reference to Exhibit 10.51 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33-38436). 10.59+ - Schedule identifying additional documents substantially identical to the Amendment to Agreement of Partnership of P&P Employees 89-B GP included as Exhibit 10.58 and setting forth the material details in which those documents differ from that document (incorporated by reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 94 Exhibit Number Description 10.60+ - Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated October 16, 1990, among Parker & Parsley, Ltd., James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), and form of Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.52 to Parker & Parsley's Registration Statement on Form S-4, dated December 31, 1990, Registration No. 33-38436). 10.61+ - Amendment to Agreement of Partnership of Parker & Parsley 90-A GP, dated February 19, 1991, among Parker & Parsley Development Company and the Investor Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.58 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.62+ - Agreement of Partnership of P&P Employees 91-A, GP, dated September 30, 1991, among Parker & Parsley Development Company, James D. Moring, and the General Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley), together with a schedule identifying substantially identical documents and setting forth the material details in which those documents differ from the foregoing document (incorporated by reference to Exhibit 10.61 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 10.63+ - Amendment to Agreement of Partnership of P&P Employees 90 Spraberry Private Development GP, dated April 22, 1991, among the Partners (as defined therein, which includes individuals who are directors and executive officers of Parker & Parsley) (incorporated by reference to Exhibit 10.67 to Parker & Parsley's Registration Statement on Form S-1, dated February 28, 1992, Registration No. 33-46082). 11.1* - Statement of Computation of Earnings per Share 16.1* - Change in Certifying Accountants 21.1* - Subsidiaries of the registrant. 23.1* - Consent of KPMG Peat Marwick LLP 23.2* - Consent of Martin Petroleum & Associates 23.3* - Consent of Gilbert Laustsen Jung Associates 27.1* - Financial Data Schedule - --------------- * Filed herewith + Executive Compensation Plan or Arrangement previously filed pursuant to Item 14(c). 95
                                                                    EXHIBIT 11.1

                        PIONEER NATURAL RESOURCES COMPANY

                 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE

                                                                     Per Share
                                                Income     Shares    Amount(a)
                                              ---------   --------   ---------
                                                  (in thousands)
December 31, 1997

Basic EPS:
   Loss available to common stockholders      $(890,671)    51,973   $  (17.14)
                                                                      ========

Effect of Dilutive Securities:
   Options/restricted stock                         -          310
   Preferred shares                               3,834      3,771
                                               --------   --------

Diluted EPS:
   Loss available to common stockholders
     plus assumed conversions                 $(886,837)    56,054   $  (15.82)
                                               ========   ========    ========


December 31, 1996

Basic EPS:
   Income available to common stockholders    $ 140,248     35,475   $    3.95
                                                                      ========

Effect of Dilutive Securities:
   Options/restricted stock                         -          394
   Preferred shares                               7,683      6,714
                                               --------   --------

Diluted EPS:
   Income available to common stockholders
     plus assumed conversions                 $ 147,931     42,583   $    3.47
                                               ========   ========    ========

December 31, 1995

Basic EPS:
   Loss available to common stockholders      $ (99,769)    35,090   $   (2.84)
                                                                      ========

Effect of Dilutive Securities:
   Options/restricted stock                         -          487
   Preferred shares                               7,683      6,714
                                               --------   --------

Diluted EPS:
   Loss available to common stockholders
     plus assumed conversions                 $ (92,086)    42,291   $   (2.18)
                                               ========   ========    ========

- ---------------

(a)   For 1997 and 1995, the computation of earnings per share was  antidilutive
      and  was not  presented  in the  accompanying  Consolidated  Statement  of
      Operations  in  accordance  with the  Statement  of  Financial  Accounting
      Standards No. 128, "Earnings per Share".







                                                                    EXHIBIT 16.1




March 17, 1988



Securities and Exchange Commission
Washington, D.C.  20549

Ladies and Gentlemen:

We were previously  principal  accountants for Pioneer Natural Resources Company
and,  under the date of February  13,  1998,  we  reported  on the  consolidated
financial statements of Pioneer Natural Resources Company and subsidiaries as of
and for the years ended  December  31, 1997 and 1996.  On December 5, 1997,  our
appointment as principal  accountants  was terminated for periods after December
31, 1997. We have read Pioneer Natural Resources  Company's  statements included
under Item 9 of Form 10-K, and we agree with such statements.

                                                  Very truly yours,



                                                  KPMG PEAT MARWICK LLP










                                                                    EXHIBIT 21.1


                           SUBSIDIARIES OF THE COMPANY

State or Jurisdiction
    of Organization           Subsidiaries
- ---------------------         ------------

Canada                        405704 Alberta Ltd.
Canada                        711841 Alberta Ltd.
Australia                     Antenor P/L
Switzerland                   Aredor Distribution Company Ltd.
Australia                     Aredor Holdings Ltd.
Australia                     Aredor Sales P/L
Australia                     Bridge Coal P/L
Australia                     Bridge Energy NSW P/L
Australia                     Bridge Exploration NSW P/L
Australia                     Bridge Minerals P/L
Australia                     Bridge Oil Australia Pty Ltd.
Australia                     Bridge Oil Neuquen Basin P/L
Netherlands Antilles          Bridge Oil Overseas N.V.
Australia                     Bridge Oil Services (Overseas) P/L
Delaware                      Bridge Oil (U.S.A.) Inc.
Australia                     Bridge Oil ZOCA 91-13 P/L
Australia                     Bridge Resources NSW P/L
Texas                         BSE Properties, Inc.
Bermuda                       CR International Limited
Australia                     Cyprienne P/L
Delaware                      DMLP Co.
Delaware                      Doram Energy, Inc.
Texas                         Dorchester Gas Systems, Inc.
Texas                         Dorchester Intrastate Gas Systems, L.P.
Australia                     Edland P/L
Delaware                      Hugoton Capital Corporation
Delaware                      LTP Investments, Inc.
Delaware                      Mesa Capital Corporation
Delaware                      Mesa Environmental Ventures Co.
Texas                         Mesa Offshore Royalty Partnership
Delaware                      Mesa Transmission Co.
Delaware                      P&PCanada LP Co.
Delaware                      Parker & Parsley Argentina, Inc.
Canada                        Parker & Parsley (Canada) Petroleum Company
Turks and Caicos Islands      Parker & Parsley Capital LLC
Delaware                      Parker & Parsley Energy Trading Company
Delaware                      Parker & Parsley Gas Processing Co.
Cayman Islands                Parker & Parsley International Holdings, Ltd.
Australia                     Parker & Parsley Petroleum Australia
                                   Holdings Pty Limited
Australia                     Parker & Parsley Petroleum Australia Pty Limited
Texas                         Parker & Parsley Scholarship Foundation
New York                      Parker & Parsley Transfer Agent Corporation
Texas                         Parsley Petroleum Company
Delaware                      Pioneer Holding Inc.
Delaware                      Pioneer International Resources Company
Texas                         Pioneer Natural Gas Company
Argentina                     Pioneer Natural Resources (Argentina) S.A.








State or Jurisdiction
    of Organization           Subsidiaries
- ---------------------         ------------

Canada                        Pioneer Natural Resources Canada Inc.
Canada                        Pioneer Natural Resources (Canada) Ltd.
Cayman Islands                Pioneer Natural Resources (Cayman) Ltd.
Delaware                      Pioneer Natural Resources (GPC) Inc.
Cayman Islands                Pioneer Natural Resources Guatemala Ltd.
Canada                        Pioneer Natural Resources (ND) Holdings Inc.
Argentina                     Pioneer Natural Resources (Tierra Del Fuego) S.A.
Delaware                      Pioneer Natural Resources USA, Inc.
Delaware                      Pioneer NGLs (USA) Inc.
Canada                        Pioneer Petroleum (TRI) Ltd.
Delaware                      Pioneer Pipelines (USA) Inc.
Texas                         Pioneer Production Corporation International
Delaware                      Pioneer Resources Inc.
Bahamas                       Pioneer Resources Africa, Ltd.
Bahamas                       Pioneer Resources Gabon - Olowi Ltd.
Delaware                      Pioneer Resources (ND) Inc.
Delaware                      Pioneer Resources Producing L.P.
Texas                         Pioneer Uravan, Inc.
Delaware                      PNR Resources (USA) Inc.
Canada                        PNRC Oil & Gas Ltd.
Texas                         PNRC Properties L.P.
Delaware                      Rosamond Drilling Company, Inc.
Pennsylvania                  Three Rivers Pipeline Business Trust
Delaware                      Westpan NGL Co.

                              Partnerships that Pioneer Natural Resources 
                              USA, Inc.is the managing general partner
                              -------------------------------------------

Texas                         Parker & Parsley 81-I, Ltd.
Texas                         Parker & Parsley 81-II, Ltd.
Texas                         Parker & Parsley 82-I, Ltd.
Texas                         Parker & Parsley 82-II, Ltd.
Texas                         Parker & Parsley 82-III, Ltd.
Texas                         Parker & Parsley 83-A, Ltd.
Texas                         Parker & Parsley 83-B, Ltd.
Texas                         Parker & Parsley 84-A, Ltd.
Texas                         Parker & Parsley 85-A, Ltd.
Texas                         Parker & Parsley 85-B, Ltd.
Texas                         Parker & Parsley Private Investment 85-A Ltd.
Texas                         Parker & Parsley Selected 85 Private
                                   Investment, Ltd.
Texas                         Parker & Parsley 86-A, Ltd.
Texas                         Parker & Parsley 86-B, Ltd.
Texas                         Parker & Parsley 86-C, Ltd.
Texas                         Parker & Parsley Private Investment 86, Ltd.
Delaware                      Parker & Parsley 87-A, Ltd.
Delaware                      Parker & Parsley 87-B, Ltd.
Delaware                      Parker & Parsley 87-A Conv., Ltd.
Delaware                      Parker & Parsley 87-B Conv., Ltd.
Delaware                      Parker & Parsley Private Investment 87, Ltd.

  





State or Jurisdiction
    of Organization           Subsidiaries
- ---------------------         ------------

Delaware                      Parker & Parsley Producing Properties 87-A, Ltd.
Delaware                      Parker & Parsley Producing Properties 87-B, Ltd.
Delaware                      Parker & Parsley 88-A, L.P.
Delaware                      Parker & Parsley 88-B, L.P.
Delaware                      Parker & Parsley 88-C, L.P.
Delaware                      Parker & Parsley 88-A Conv., L.P.
Delaware                      Parker & Parsley 88-B Conv., L.P.
Delaware                      Parker & Parsley 88-C Conv., L.P.
Delaware                      Parker & Parsley Private Investment 88, L.P.
Delaware                      Parker & Parsley Producing Properties 88-A, L.P.
Delaware                      Parker & Parsley 89-A, L.P.
Delaware                      Parker & Parsley 89-B, L.P.
Texas                         Parker & Parsley 89-A Conv., L.P.
Texas                         Parker & Parsley 89-B Conv., L.P.
Texas                         P&P Employees 89-A Conv., L.P.
Texas                         P&P Employees 89-B Conv., L.P.
Delaware                      Parker & Parsley Private Investment 89, L.P.
Texas                         P&P Employees Private Investment 89, L.P.
Delaware                      Parker & Parsley 90-A Conv., L.P.
Delaware                      Parker & Parsley 90-B Conv., L.P.
Delaware                      Parker & Parsley 90-C Conv., L.P.
Delaware                      Parker & Parsley 90-A, L.P.
Delaware                      Parker & Parsley 90-B, L.P.
Delaware                      Parker & Parsley 90-C, L.P.
Texas                         P&P Employees 90-A Conv., L.P.
Texas                         P&P Employees 90-B Conv., L.P.
Texas                         P&P Employees 90-C Conv., L.P.
Delaware                      Parker & Parsley Private Investment 90
                                   Conv., L.P.
Texas                         P&P Employees Private Investment 90 Conv., L.P.
Delaware                      Parker & Parsley 90 Spraberry Private
                                   Development Conv., L.P.
Texas                         P&P Employees 90 Spraberry Private
                                   Development L.P.
Delaware                      Parker & Parsley 91-A, L.P.
Delaware                      Parker & Parsley 91-B, L.P.
Delaware                      Parker & Parsley 91-A Conv., L.P.
Delaware                      Parker & Parsley 91-B Conv., L.P.
Texas                         P&P Employees 91-A G.P.
Texas                         P&P Employees 91-B G.P.
Texas                         Parker & Parsley 1992 Direct Investment
                                   Program, Ltd.
Texas                         Parker & Parsley 1993 Direct Investment
                                   Program, Ltd.
Texas                         Parker & Parsley 1994 Direct Investment
                                   Program, Ltd.
Texas                         Midkiff Development Drilling Program, Ltd.

                   




                                                                    EXHIBIT 23.1



                         CONSENT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
Pioneer Natural Resources Company:

     We consent to the incorporation by reference in the Registration Statements
(No. 333-35087,  No. 333-35165,  No. 333-39153, No. 333-39249, No. 33-44851, No.
333-35085 and No. 333-35175) on Form S-8 and (No. 333-42315,  No. 333-44439, No.
333-46311 and No.  333-39381) on Form S-3 of Pioneer Natural  Resources  Company
and  subsidiaries  and its  predecessors  of our report dated February 13, 1998,
relating to the consolidated balance sheets of Pioneer Natural Resources Company
and  subsidiaries as of December 31, 1997 and 1996 and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
years in the three-year  period ended December 31, 1997, which report appears in
the December 31, 1997 annual  report on Form 10-K of Pioneer  Natural  Resources
Company.  Our  report  refers to a change in the  method of  accounting  for the
impairment of long-lived assets and for long-lived assets to be disposed of.




                                             KPMG PEAT MARWICK LLP

Midland, Texas
March 18, 1998









                                                                    EXHIBIT 23.2

                CONSENT OF INDEPENDENT ENGINEERS AND GEOLOGISTS

The Board of Directors and Stockholders
Pioneer Natural Resources Company

     We consent to the incorporation by reference in the Registration Statements
(No. 333-35087,  No. 333-35165, No. 333-39153, No. 333-39249, No. 333-44851, No.
333-35085,  and No. 333- 35175) on Form S-8 and (No.  333-42315,  No. 333-44439,
No.  333-46311  and No.  333-39381)  on Form S-3 of  Pioneer  Natural  Resources
Company and subsidiaries,  to our report dated January 29, 1998, in the December
31, 1997 annual report on Form 10-K of Pioneer Natural Resources Company.
                                                    


                                        MARTIN PETROLEUM & ASSOCIATES



                                        / s /  John Hewitt
                                        -----------------------------------
                                        John Hewitt, M.A., P. Eng.










                                                             
                                                                    EXHIBIT 23.3




                 CONSENT OF INDEPENDENT ENGINEERS AND GEOLOGISTS

The Board of Directors and Stockholders
Pioneer Natural Resources Company

     We consent to the incorporation by reference in the Registration Statements
(No. 333-35087,  No. 333-35165, No. 333-39153, No. 333-39249, No. 333-44851, No.
333-35085,  and No. 333- 35175) on Form S-8 and (No.  333-42315,  No. 333-44439,
No.  333-46311  and No.  333-39381)  on Form S-3 of  Pioneer  Natural  Resources
Company and subsidiaries,  to our report dated January 19, 1998, in the December
31, 1997 annual report on Form 10-K of Pioneer Natural Resources Company.


                                       Very truly yours,


                                       GILBERT LAUSTSEN JUNG ASSOCIATES LTD.



                                       / s / Wayne W. Chow
                                       -------------------------------------
                                       Wayne W. Chow, P. Eng. and Vice President

Calgary, Alberta
March 18, 1998









 

5 0001038357 PIONEER 1,000 YEAR DEC-31-1997 DEC-31-1997 73,408 0 191,932 0 13,576 308,188 4,165,062 605,203 3,946,590 261,552 0 0 0 1,010 1,547,835 3,946,590 536,782 546,029 144,170 1,838,918 7,124 0 77,550 (1,377,563) (500,300) (877,263) 0 (13,408) 0 (890,671) (17.14) (17.14)
                                                                   EXHIBIT 10.42

                       PIONEER NATURAL RESOURCES USA, INC.

                                  MATCHING PLAN

            (As Amended and Restated Effective as of October 1, 1997)







                       PIONEER NATURAL RESOURCES USA, INC.
                                  MATCHING PLAN

            (As Amended and Restated Effective as of October 1, 1997)

                                TABLE OF CONTENTS


                                                                           Page

PREAMBLE...................................................................  1

ARTICLE I.    DEFINITIONS AND CONSTRUCTION.................................  1
              Section 1.1  Definitions.....................................  1
              Section 1.2  Construction....................................  7

ARTICLE II.   ELIGIBILITY..................................................  7
              Section 2.1  Eligibility and Participation...................  7

ARTICLE III.  CONTRIBUTIONS, LIMITATIONS AND FORFEITURES...................  7
              Section 3.1  Matching Contributions..........................  7
              Section 3.2  Crediting of Contributions......................  8
              Section 3.3  Return of Matching Contributions................  8
              Section 3.4  Application and Allocation of Forfeitures.......  8
              Section 3.5  Rollover Contributions..........................  8
              Section 3.6  Limitations on Contributions....................  8

ARTICLE IV.   TRUST FUND................................................... 11
              Section 4.1  Trust and Trustee............................... 11
              Section 4.2  Trust Investment Options........................ 12

ARTICLE V.    VESTING...................................................... 12
              Section 5.1  Fully Vested Accounts........................... 12
              Section 5.2  Vesting of Matching Account..................... 12

ARTICLE VI.   DISTRIBUTIONS................................................ 13
              Section 6.1  Time and Form of Distribution................... 13
              Section 6.2  Distribution of Retirement Benefit.............. 14
              Section 6.3  Distribution of Death Benefit................... 15
              Section 6.4  Distribution of Separation from Employment
                      Benefit.............................................. 16
              Section 6.5  Forfeitures..................................... 16
              Section 6.6  Distributions to Minors and Persons Under Legal
                       Disability.......................................... 18

                                       (i)





              Section 6.7  Benefits Payable to Missing Participant or
                       Beneficiary......................................... 19
              Section 6.8  Transfer of Eligible Rollover Distribution...... 19
              Section 6.9  Qualified Domestic Relations Orders............. 19

ARTICLE VII.  PLAN ADMINISTRATION.......................................... 20
              Section 7.1  Matching Plan Committee......................... 20
              Section 7.2  Powers, Duties and Liabilities of the Committee. 21
              Section 7.3  Rules, Records and Reports...................... 21
              Section 7.4  Administration Expenses and Taxes............... 21

ARTICLE VIII. AMENDMENT AND TERMINATION.................................... 22
              Section 8.1  Amendment....................................... 22
              Section 8.2  Termination..................................... 22

ARTICLE IX.   TOP-HEAVY PROVISIONS......................................... 22
              Section 9.1  Top-Heavy Definitions........................... 22
              Section 9.2  Minimum Contribution Requirement................ 24

ARTICLE X.    MISCELLANEOUS GENERAL PROVISIONS............................. 24
              Section 10.1  Spendthrift Provision.......................... 24
              Section 10.2  Claims Procedure............................... 25
              Section 10.3  Maximum Contribution Limitation................ 25
              Section 10.4  Employment Noncontractual...................... 26
              Section 10.5  Limitations on Responsibility.................. 26
              Section 10.6  Merger or Consolidation........................ 26
              Section 10.7  Applicable Law................................. 26



                                      (ii)





                       PIONEER NATURAL RESOURCES USA, INC.
                                  MATCHING PLAN

            (As Amended and Restated Effective as of October 1, 1997)


     THIS MATCHING PLAN, a money purchase pension plan, made and executed by
  PIONEER NATURAL RESOURCES USA, INC., a Delaware corporation (the "Company"),

                          W I T N E S S E T H T H A T :

         WHEREAS,  the  Company has  heretofore  established  a qualified  money
purchase pension plan and trust known as the Pioneer Natural Resources USA, Inc.
Matching  Plan  (formerly  known as the Mesa  Employees  Premium  Plan and Trust
Agreement) for the benefit of certain of its employees; and

         WHEREAS,  the  Company  now  desires to  continue  said money  purchase
pension plan and trust without  interruption  by amending and restating the plan
and trust  document in its  entirety to separate  the plan and trust  provisions
into two  separate  documents,  update  the  plan  language,  incorporate  prior
amendments and make certain other changes;

         NOW,  THEREFORE,  in  consideration  of the  premises  and  pursuant to
Section 17.4 thereof, the Company hereby amends and restates the plan provisions
of said plan and trust as the Pioneer Natural Resources USA, Inc. Matching Plan,
as amended and restated effective as of October 1, 1997, to read as follows:

                                   ARTICLE I.

                          DEFINITIONS AND CONSTRUCTION

         Section  1.1  Definitions.   Unless  the   context  clearly   indicates
otherwise, when used in this Plan:


               (a)  "Account"  means  a  Participant's  Matching  Account,  Mesa
         Premium Account and/or Rollover Account, as the context requires.

               (b)  "Affiliated Company" means any corporation  or organization,
         other  than  an Employer,  which  is a  member of a controlled group of
         corporations (within  the meaning of Section 414(b) of  the Code) or of
         an  affiliated service group (within the  meaning of  Section 414(m) of
         the Code) with  respect to which an Employer  is  also  a  member,  and
         any  other  incorporated  or  unincorporated  trade or  business  which
         along with  an Employer is under common control (within the  meaning of
         the regulations from time  to time promulgated by the  Secretary of the
         Treasury  pursuant to Section 414(c) of the  Code); provided,  however,
         that for the purposes of Section 10.3 of the Plan,  Section 414 (b) and


                                      1





         (c) of the Code  shall be  applied as modified by Section 415(h) of the
         Code.

               (c)  "Code" means the Internal Revenue Code of 1986, as amended.

               (d)  "Committee" means the  Matching Plan  Committee appointed by
         the Board of Directors of the Company to administer the Plan.

               (e)  "Company"  means  Pioneer  Natural  Resources  USA,  Inc., a
         Delaware corporation, and any successor thereto.

               (f)  "Compensation"   means   the   sum  of  (i)  the  Limitation
         Compensation paid by an Employer to an Employee, (ii) any Total Pre-Tax
         Contributions  made by an Employer to the Pioneer 401(k) Plan on behalf
         of such Employee,  and (iii) any salary  reduction  amounts  elected by
         such Employee for the purchase of benefits pursuant to a cafeteria plan
         (within the  meaning of Section  125(d) of the Code)  maintained  by an
         Employer;  provided,  however,  that except for purposes of determining
         whether an Employee is a Highly Compensated  Employee or a Key Employee
         (as defined in Section  9.1(c)),  the Compensation of an Employee taken
         into account under the Plan for any Plan Year shall not exceed $150,000
         (as  adjusted  to  take  into  account  any  cost-of-living   increases
         authorized  pursuant to Section  401(a)(17)(B) of the Code). Solely for
         purposes   of  this   definition,   compensation   from   an   employer
         participating  in the Mesa Premium Plan prior to October 1, 1997, shall
         be deemed to be Compensation.

               (g)  "Covered  Employee"  means  any  Employee  other  than (i) a
         member  of  a  collective   bargaining  unit  with  which  an  Employer
         negotiates  and with  respect to whom no  coverage  under this Plan has
         been provided by collective  bargaining  agreement,  (ii) a nonresident
         alien with respect to the United  States who receives no earned  income
         from an  Employer  which  constitutes  income from  sources  within the
         United States,  (iii) a temporary or seasonal Employee as determined in
         accordance  with the  Employer's  normal  personnel  policies,  (iv) an
         individual performing services for an Employer whom the Employer treats
         as an independent  contractor  for  employment tax purposes,  or (v) an
         individual who is treated as a leased employee by an Employer.

               (h)  "Employee" means any individual employed by an Employer.

               (i)  "Employer" shall include the Company and other  incorporated
         or  unincorporated trade or business  which may subsequently adopt this
         Plan with the consent of the Board of Directors of the Company.

               (j)  "Employment Date" means the date an Employee first  performs
         an Hour of Service.



                                        2





               (k)  "Highly   Compensated   Employee"  means  for  a  Plan  Year
         commencing after December 31, 1996:

                    (1)  any  Employee  who during such Plan  Year or during the
               preceding Plan Year was at any time a 5 percent owner (as defined
               in Section  416(i)(1)  of the Code) of an  Employer or Affiliated
               Company; or

                    (2)  any  Employee  who  during  the  preceding   Plan  Year
               received Compensation greater than  $80,000 (as  adjusted to take
               into account any cost-of-living  increases authorized pursuant to
               Section 414(q)(1) of the Code) and, if the Company so elects, who
               is  in the  group  consisting of the  top 20% (when ranked on the
               basis of Compensation received during such preceding year) of all
               Employees,  except  those  excluded pursuant to Section 414(q)(5)
               of the Code.

         Solely for  purposes of this  definition,  (i) an employee of either an
         Affiliated  Company or an employer  participating  in the Mesa  Premium
         Plan shall be deemed to be an Employee, (ii) compensation received from
         either an Affiliated  Company or an employer  participating in the Mesa
         Premium  Plan  shall  be  deemed  to  be  Compensation,   and  (iii)  a
         nonresident  alien who  receives  no earned  income from an Employer or
         Affiliated  Company which  constitutes  income from sources  within the
         United States shall not be  considered  an Employee.  For the Plan Year
         ending  December  31,  1996,  Highly  Compensated  Employees  shall  be
         determined  pursuant to the provisions of the  Retirement  Savings Plan
         for Employees of Parker & Parsley as in effect for such Plan Year.

               (l)  "Hour of  Service"  means an  hour for which an  Employee is
         directly  or  indirectly   compensated  or  entitled  to   compensation
         (including  back  pay,  regardless  of  mitigation  of  damages)  by an
         Employer for the  performance  of duties for an Employer or for reasons
         (such as vacation,  sickness or disability)  other than the performance
         of duties for an  Employer.  An Employee  will be  credited  with eight
         Hours of Service per day for any  customary  work period  during  which
         such Employee is on leave of absence authorized by his or her Employer.
         Leaves of absence shall be granted by an Employer to its Employees on a
         uniform, nondiscriminatory basis. In no event shall more than 501 Hours
         of Service be  credited  on  account  of any single  continuous  period
         during which the individual  performs no duties. An Employee's Hours of
         Service shall be credited to the appropriate  Plan Years or eligibility
         computation  period  determined  in accordance  with the  provisions of
         Section  2530.200b-2(b) and (c) of the Department of Labor Regulations,
         which are incorporated  herein by this reference.  In determining Hours
         of Service for the purposes of this Plan,  periods of  employment by an
         Affiliated  Company  and  periods of  employment  as a leased  employee
         (within  the  meaning of Section  414(n) of the Code) of an Employer or
         Affiliated  Company  shall be deemed to be periods of  employment by an
         Employer.



                                        3





               (m)  "Investment   Fund"  means  any   fund  authorized  for  the
         investment of Trust assets pursuant to Section 4.2.

               (n)  "Limitation  Compensation" means wages within the meaning of
         Section  3401(a) of the Code and all other payments of  remuneration to
         an Employee by an  Employer (in  the course of  the Employer's trade or
         business)  for which the Employer is required to furnish the Employee a
         written  statement under Sections  6041(d),  6051(a)(3) and 6052 of the
         Code,  but  determined  without  regard  to any  rules  that  limit the
         remuneration  included  in wages based on the nature or location of the
         employment  or  the  services  performed  (such  as the  exception  for
         agricultural  labor  in  Section  3401(a)(2)  of the  Code);  provided,
         however,  that the  Limitation  Compensation  of an Employee taken into
         account under the Plan for any Plan Year shall not exceed  $150,000 (as
         adjusted to take into account any cost-of-living  increases  authorized
         pursuant to Section 401(a)(17)(B) of the Code).

               (o)  "Matching   Account"  means  the  account  established   and
         maintained  under this Plan by the Committee to record a  Participant's
         interest  under this Plan  attributable  to any Matching  Contributions
         made by an Employer for such Participant.

               (p)  "Matching  Contribution"  means a  contribution  made by  an
         Employer to this Plan for a Participant pursuant to Section 3.1.

               (q)  "Mesa Premium  Account" means  the  account  established and
         maintained  under this Plan by the Committee to record a  Participant's
         interest under this Plan  attributable to Employer  contributions  made
         for such  Participant  pursuant to the  provisions  of the Mesa Premium
         Plan as in effect on September 30, 1997.

               (r)  "Mesa  Premium  Plan" means the Mesa Employees  Premium Plan
         and Trust Agreement, as in effect from time to time prior to October 1,
         1997.

               (s)  "Non-Highly Compensated Employee" means for a Plan  Year any
         Employee who is not a Highly  Compensated  Employee for such Plan Year.

               (t)  The "Normal Retirement Date" of a  Participant means the day
         such Participant attains the age of 65 years.

               (u)  "One  Year Break in Service"  means a 12  consecutive  month
         Period of Severance during which an Employee fails to complete a single
         Hour of Service.

               (v)  "Participant"  means any individual who was a participant in
         the  Mesa  Premium  Plan  or any  individual  meeting  the  eligibility
         requirements  of Article II, and whose Vested  Interest under this Plan
         has not been fully distributed.



                                        4





               (w)  "Period  of  Service"  means,  for purposes of determining a
         Participant's  Vested Interest in his or her Matching Account, the sum,
         rounded  downward  to the nearest  whole  year,  of each period of time
         commencing with an Employee's  Employment Date or Reemployment Date and
         ending on the first date thereafter  that a Period of Severance  begins
         (except as provided in subsection (x) of this Section in the case of an
         Employee's  maternity or paternity leave of absence).  Included in such
         sum to be credited  to an Employee  shall be each period of time during
         which the Employee is on an authorized  leave of absence for reasons of
         vacation,  sickness,  layoff or another occasion designated and applied
         by an Employer or Affiliated Company on a nondiscriminatory  basis, but
         in no event  exceeding  one year in length.  A Period of  Service  also
         includes any Period of Severance of less than 12 consecutive months. If
         an Employee  who has no vested  right to any amount  credited to his or
         her Matching Account incurs a One Year Break in Service,  such Employee
         shall  forfeit  his or her  prior  Period of  Service  unless he or she
         completes an additional one-year Period of Service before the number of
         his or her consecutive One Year Breaks in Service equals five.

               (x)  "Period of Severance" means a period of time commencing with
         the  date  an  Employee  ceases  to  be  employed  by  an  Employer  or
         Affiliated  Company for reasons of  Retirement,  Permanent  Disability,
         death, being discharged, or voluntarily ceasing employment, or with the
         first  anniversary  of the  date of his or her  absence  for any  other
         reason,  and ending with the date such Employee resumes employment with
         an Employer or Affiliated Company;  provided,  however, that solely for
         purposes of determining  whether an Employee incurs a One Year Break in
         Service, the Period of Severance of an Employee who is absent from work
         due to the  pregnancy  of the  Employee,  the  birth  of a child of the
         Employee, the placement of a child with the Employee in connection with
         the adoption of such child by such  Employee,  or caring for such child
         for a period  beginning  immediately  following such birth or placement
         shall not commence  until the second  anniversary  of the first date of
         such absence and the period between the first and second  anniversaries
         of the first date of such absence shall be considered  neither a Period
         of Service nor a Period of Severance.

               (y)  "Permanent   Disability"  means  the  total  and   permanent
         incapacity of a  Participant  to perform the usual duties of his or her
         employment with an Employer or Affiliated  Company as determined by the
         Committee. Such incapacity shall be deemed to exist when certified by a
         physician acceptable to the Committee.

               (z)  "Pioneer  401(k)  Plan" means the Pioneer Natural  Resources
         USA, Inc. 401(k) Plan, as in effect from time to time.

               (aa) "Pioneer Pre-Tax Contributions" means  Pre-Tax Contributions
         made  by  an  Employer  to  the  Pioneer  401(k)  Plan  on  behalf of a
         Participant.



                                        5





               (bb) "Plan"  means  this  Pioneer  Natural  Resources  USA,  Inc.
         Matching Plan,  amended  and restated  effective as of October 1, 1997,
         and as from time to time in effect thereafter.

               (cc) "Plan Year" means the calendar year.

               (dd) "Qualified  Joint  and  Survivor  Annuity" means an  annuity
         which  is  payable  for the  life of the  Participant  with a  survivor
         annuity  payable for the life of his or her spouse  equal to 50% of the
         amount  of the  annuity  payable  during  the life of the  Participant;
         provided,  however,  that  in  the  case  of a  Participant  who is not
         married,  a Qualified Joint and Survivor Annuity means an annuity which
         is payable for the life of the Participant.  "Alternate Qualified Joint
         and Survivor Annuity" means an annuity which is payable for the life of
         the Participant  with a survivor annuity payable for the life of his or
         her spouse  equal to 75% or 100% of the amount of the  annuity  payable
         during the life of the Participant.

               (ee) "Qualified Preretirement Survivor  Annuity" means an annuity
         which is payable for the life of the  Participant's  surviving  spouse.

               (ff) "Reemployment   Date"  means  the  date  an  Employee  first
         performs an Hour of Service following a Period of Severance.

               (gg) "Retirement"  means   the  termination  of  a  Participant's
         employment  with an Employer or  Affiliated  Company on or after his or
         her Normal  Retirement Date for any reason other than death or transfer
         to the employment of another Employer or Affiliated Company.

               (hh) "Rollover   Account"  means  the  account  established   and
         maintained  under this Plan by the Committee to record a  Participant's
         interest  under  this  Plan   attributable  to  (i)  Rollover  Property
         contributed  by such  Participant  to this Plan pursuant to Section 3.5
         and (i) any amounts  credited to his or her Rollover  Account under the
         Mesa Premium Plan as in effect on September 30, 1997.

               (ii) "Rollover  Property" means property the value of which would
         be excluded from the  gross  income  of the  transferor  under  Section
         402(c), 403(a)(4) or 408(d)(3) of the Code if transferred to the Plan.

               (jj) "Trust" means the trust fund established pursuant to Section
         4.1.

               (kk) "Trustee"  means the  individual  or  corporate  trustee  or
         trustees from time to time  appointed and acting as trustee or trustees
         of the Trust established pursuant to the Plan.



                                        6





               (ll) "Valuation Date" means each business day.

               (mm) The  "Vested  Interest"  of a  Participant  means  the  then
         vested  portion  of  the  amount  credited  to  the  Accounts  of  such
         Participant at the particular point in time in question.

         Section 1.2  Construction.  The titles to the Articles and the headings
of the Sections in this Plan are placed herein for convenience of reference only
and in case of any conflict the text of this instrument, rather than such titles
or headings,  shall control.  Whenever a noun or pronoun is used in this Plan in
plural form and there be only one person or entity  within the scope of the word
so used,  or in singular form and there be more than one person or entity within
the  scope of the word so used,  such  noun or  pronoun  shall  have a plural or
singular meaning as appropriate under the circumstance.


                                   ARTICLE II.

                          ELIGIBILITY AND PARTICIPATION

         Section 2.1  Eligibility and Participation.  Each Covered  Employee who
is a participant  in the Mesa Premium Plan on September 30, 1997 shall  continue
to be a  Participant  in the Plan as of  October 1,  1997.  Each  other  Covered
Employee  shall become a Participant  in this Plan on the first day of the first
pay period in the  calendar  month next  following  his or her  employment  as a
Covered  Employee.  Any  Participant  who ceases to be a Covered  Employee shall
thereupon cease to participate in the Plan; provided,  however, that if any such
Participant  is  thereafter  reemployed as a Covered  Employee,  he or she shall
resume participation in the Plan as of the date of such reemployment.

                                  ARTICLE III.

                   CONTRIBUTIONS, LIMITATIONS AND FORFEITURES

         Section  3.1  Matching  Contributions.  For each pay period an Employer
shall make to the Plan for each  Participant  in its employ and allocate to such
Participant's  Matching  Account  a  contribution  equal to 200  percent  of the
Pioneer Pre-Tax  Contributions made by the Employer on such Participant's behalf
during  such  pay  period  which  are  not in  excess  of five  percent  of such
Participant's  Basic  Compensation  (as defined in the Pioneer  401(k) Plan) for
such pay period.  The  Matching  Contributions  to be made to the Plan for a pay
period shall be paid to the Trustee as soon as practicable, but no later than 30
days after the end of the month in which such pay period ends.



                                        7





         Section 3.2  Crediting of Contributions.  The Committee shall establish
and maintain a Matching Account for each Participant. All Matching Contributions
made for a Participant shall be credited to such Participant's Matching Account.

         Section 3.3  Return of  Matching  Contributions.  Contributions made to
this Plan are conditioned  upon being currently  deductible under Section 404 of
the Code.  Any provision of this Plan to the contrary  notwithstanding,  upon an
Employer's  request,  any such contribution or portion thereof made to this Plan
by such  Employer  which  (i)  was  made  under  a  mistake  of  fact  which  is
subsequently  discovered or (ii) is disallowed as a deduction  under Section 404
of the Code,  shall be  returned to such  Employer to the extent not  previously
distributed to Participants or their beneficiaries;  provided, however, that the
amounts  returnable to an Employer  pursuant to this Section shall be reduced by
any Trust losses  allocable  thereto and shall be returned to such Employer only
if such  return is made  within  one year  after  the  mistaken  payment  of the
contribution or the date of the  disallowance of the deduction,  as the case may
be.  Except as provided in this  Section,  no  contribution  made by an Employer
pursuant to this Plan shall ever revert to or be recoverable by any Employer.

         Section 3.4  Application  and  Allocation of  Forfeitures.  All amounts
forfeited  during a Plan Year shall  first be applied to restore  any  forfeited
Matching Account  required to be restored  pursuant to Sections 6.5 and 6.7, and
any forfeitures in excess of the amount needed to restore any such Account shall
be used to reduce the amount of the earliest subsequent  Matching  Contributions
the Employer otherwise would be required to make to the Plan.

         Section 3.5  Rollover Contributions. With the consent of the Committee,
any Covered  Employee  (regardless  of whether he or she is a  Participant)  may
contribute  Rollover Property in the form of cash to the Plan. Each contribution
of Rollover  Property  shall be credited  to a separate  Rollover  Account to be
established  and maintained  for the benefit of the  contributing  Employee.  An
Employee  who is not a  Participant,  but for whom a  Rollover  Account is being
maintained,  shall be accorded all of the rights and privileges of a Participant
under  the Plan  except  that no  contributions  (other  than  contributions  of
Rollover  Property)  shall be made for such  Employee  until he or she meets the
eligibility and participation requirements of Section 2.1.

         Section 3.6  Limitations on Contributions.

               (a)  Any provision of this Plan to the contrary  notwithstanding,
         if for any  Plan  Year  the  contribution  percentage for the  group of
         Highly  Compensated  Employees  eligible  to  receive an allocation  of
         Matching  Contributions  for such Plan Year fails to satisfy one of the
         following tests:

                    (1)  the contribution  percentage for  said  group of Highly
               Compensated   Employees  is  not   more   than  1.25  times   the
               contribution   percentage   for the preceding   Plan Year for all
               


                                        8





               Non-Highly Compensated Employees eligible for the  preceding Plan
               Year to receive an allocation of Matching Contributions, or

                    (2) the excess of the contribution percentage for said group
               of Highly Compensated Employees over the contribution  percentage
               for  the  preceding Plan for all Non-Highly Compensated Employees
               eligible for the preceding Plan Year to receive an allocation  of
               Matching  Contributions is not more than  two percentage  points,
               and  the  contribution   percentage  for  said  group  of  Highly
               Compensated Employees is not more than two times the contribution
               percentage  for  the  preceding  Plan  Year  for  all  Non-Highly
               Compensated  Employees eligible for the preceding  Plan  Year  to
               receive an allocation of Matching Contributions,

         then the  contribution  percentage for  Participants who are members of
         said group of Highly Compensated Employees shall be reduced by reducing
         the  Matching  Contributions  made for such  Plan  Year for the  Highly
         Compensated   Employees  with  the  largest   individual   contribution
         percentages to the largest uniform contribution  percentage (commencing
         with the Highly  Compensated  Employee  with the  largest  contribution
         percentage  and  reducing  his or her  contribution  percentage  to the
         extent  necessary  to satisfy  one of the above  tests or to lower such
         contribution  percentage to the  contribution  percentage of the Highly
         Compensated Employee with the next highest contribution percentage, and
         repeating  this process as  necessary)  that  permits the  contribution
         percentage  for said group of Highly  Compensated  Employees to satisfy
         one of said  tests.  For  purposes  of this  subsection  (a),  the term
         "contribution percentage" for a specified group of Employees for a Plan
         Year means the average of the ratios  (calculated  separately  for each
         Employee  in such  group and after  application  of the  reduction  and
         forfeiture  provisions of Sections 3.4(a) and (b) of the Pioneer 401(k)
         Plan) of (i) the aggregate amount of Matching Contributions made to the
         Plan for each such  Employee  for that year and, at the election of the
         Committee,  all or a portion of the Total Pre-Tax Contributions made on
         behalf of such Employee to the Pioneer  401(k) Plan for that year which
         are  not in  excess  of the  amount  of  such  contributions  that  are
         permitted to be taken into account under Sections 401(k) and (m) of the
         Code  and the  regulations  thereunder,  to  (ii)  the  amount  of such
         Employee's   Compensation   for  that  year  or,  in  the   Committee's
         discretion,  only  for such  portion  of that  year  during  which  the
         Employee was eligible to participate in the Plan. Any provision of this
         Section  to the  contrary  notwithstanding,  for the Plan  Year  ending
         December 31, 1997,  the Company may elect,  in accordance  with Section
         401(m) of the Code and other applicable authority,  to use data for the
         current Plan Year rather than the preceding  Plan Year in computing the
         contribution  percentage of Non-Highly Compensated Employees. If two or
         more  plans to  which  matching  contributions  or  employee  after-tax
         contributions  are made are  considered  as one  plan for  purposes  of
         Section  410(b) of the Code  (other  than for  purposes  of the average
         benefit  percentage  test), such plans shall be treated as one plan for
         purposes   of  determining  the  contribution   percentages  for   this

                                        9





         subsection  (a). If a Highly Compensated Employee is  a  participant in
         two or more plans to which matching contributions or employee after-tax
         contributions   are  made,  then  for   purposes  of   determining  the
         contribution  ratio of such Employee,  all such plans (other than those
         that may not be permissively aggregated) shall be treated as one plan.

               (b)  The aggregate  amount of any Matching Contributions made for
         Participants  which  cannot be credited  to the Matching Accounts for a
         Plan Year  because  of the  limitation  contained in subsection  (a) of
         this Section (along with any income allocable to such contributions for
         such Plan Year,  but not for the gap period  following  such Plan Year)
         shall be forfeited if forfeitable, but if not forfeitable,  distributed
         to such  Participants  no later than 2 1/2 months after the end of such
         year on the basis of the amount of Matching Contributions made for each
         such Participant  (commencing with the Highly Compensated Employee with
         the  largest  amount of Matching  Contributions  for such Plan Year and
         reducing his or her Matching  Contributions  to the extent necessary or
         to lower such  amount to the amount of  Matching  Contributions  of the
         Highly  Compensated  Employee with the next highest  amount of Matching
         Contributions,  and repeating  this process as  necessary).  The income
         allocable to any such excess aggregate  contributions for a Participant
         for a Plan Year shall be determined by multiplying the amount of income
         allocable  to such  Participant's  Matching  Account for such year by a
         fraction,  the numerator of which is the amount of the excess aggregate
         contributions  for such year and the denominator of which is the sum of
         the amount credited to such  Participant's  Matching  Account as of the
         beginning  of such year plus the amount of the  Matching  Contributions
         made for such Participant for such year.

               (c)  Any provision of this Plan to the contrary  notwithstanding,
         in addition to the above limitations of this Section, the  sum  of  the
         actual  deferral  percentage  and  the  contribution percentage for the
         group of Highly  Compensated  Employees  as  determined pursuant to and
         after any  reduction  in such percentages required by subsection (a) of
         this Section and  Section 3.4(a) of the  Pioneer 401(k)  Plan shall not
         exceed the  "aggregate  limit."  The  "aggregate  limit" shall be equal
         to the greater of:

                         (1)  the sum of:  (i) 1.25 times  the  greater  of  the
               relevant actual deferral percentage or the  relevant contribution
               percentage, and (ii) two percentage points plus the lesser of the
               relevant actual  deferral percentage or the relevant contribution
               percentage,  provided that the  amount in this  clause (ii) shall
               not exceed two times the lesser of the relevant  actual  deferral
               percentage or the relevant contribution percentage; or

                         (2)  the sum of:  (i) 1.25  times  the  lesser  of  the
               relevant actual deferral percentage or the relevant  contribution
               percentage,   and (ii) two  percentage points plus the greater of
               the   relevant  actual   deferral   percentage  or  the  relevant
               contribution percentage,  provided that the amount in this clause
               


                                       10





               (ii) shall  not  exceed  two  times  the  greater of the relevant
               actual  deferral   percentage   or   the  relevant   contribution
               percentage.

         The "relevant  actual  deferral  percentage"  means the actual deferral
         percentage  determined  for the preceding Plan Year pursuant to Section
         3.4(a)  of  the  Pioneer  401(k)  Plan  for  the  group  of  Non-Highly
         Compensated  Employees  eligible during the preceding Plan Year to have
         Pre-Tax  Contributions  or  Pre-Tax  Bonus  Contributions  made  to the
         Pioneer 401(k) Plan. The "relevant  contribution  percentage" means the
         contribution percentage determined for the preceding Plan Year pursuant
         to  subsection  (a)  of  this  Section  for  the  group  of  Non-Highly
         Compensated  Employees  eligible for the preceding Plan Year to receive
         an  allocation  of  Matching  Contributions.  In  the  event  that  the
         aggregate  limit is  exceeded  in any year,  then the  actual  deferral
         percentage under the Pioneer 401(k) Plan and/or contribution percentage
         under this Plan for Participants who are members of the group of Highly
         Compensated  Employees  shall be  reduced  by  reducing  Total  Pre-Tax
         Contributions   to  the  Pioneer   401(k)  Plan  and/or  any   Matching
         Contributions  made for such Plan  Year for or on behalf of the  Highly
         Compensated  Employees  with the  largest  individual  actual  deferral
         percentages  and/or  contribution  percentages  to the largest  uniform
         actual deferral percentage and/or contribution  percentage  (proceeding
         in the manner  prescribed in Section  3.4(a) of the Pioneer 401(k) Plan
         and  subsection (a) of this Section) that permits the sum of the actual
         deferral  percentage  and  contribution  percentage  for said  group of
         Highly  Compensated  Employees to satisfy the above  restrictions.  The
         provisions of  subsection  (b) of this Section shall apply with respect
         to any  Matching  Contributions  which  cannot be  credited to Matching
         Accounts  under this Plan because of the  limitation  contained in this
         subsection (c).

               (d)  If  any  portion  of  a   Pioneer  Pre-Tax  Contribution  is
         distributed to a Participant  pursuant to Section 3.4(b) of the Pioneer
         401(k)  Plan,  any portion of a Matching  Contribution  (along with any
         income  allocable  thereto) made to this Plan for such Participant that
         corresponds to such distributed  Pioneer Pre-Tax  Contribution shall be
         forfeited.


                                   ARTICLE IV.

                  TRUST FUND, INVESTMENT OPTIONS AND VALUATIONS

         Section 4.1  Trust and  Trustee.  All of the contributions  paid to the
Trustee  pursuant  to this Plan and the Mesa  Premium  Plan,  together  with the
income  therefrom  and the  increments  thereof,  shall  be held in trust by the
Trustee under the terms and provisions of the separate trust  agreement  between
the Trustee and the Company, a copy of which is attached hereto and incorporated
herein by this  reference for all purposes,  establishing  a trust fund known as



                                       11





the PIONEER NATURAL RESOURCES USA, INC. MATCHING TRUST for the exclusive benefit
of the Participants and their beneficiaries.

         Section 4.2  Trust Investment  Options.  For investment  purposes,  the
trust fund  established  under the Trust  shall be divided  into such number and
kind of separate and distinct  Investment Funds as the Committee in its absolute
discretion  shall authorize from time to time. The assets of the Trust allocated
to a particular  Investment  Fund shall be invested by the Trustee and/or one or
more investment managers duly appointed in accordance with the provisions of the
trust  agreement  establishing  the  Trust,  as the case may be, in such type of
property  acceptable  to the  Trustee as the  Trustee is directed to acquire and
hold for such  Investment  Fund.  Upon becoming a Participant in the Plan,  each
Participant  shall  direct,  in the manner  prescribed  by the  Committee in its
absolute discretion,  that all amounts credited to his or her Accounts under the
Plan shall be invested, in percentage multiples authorized by the Committee,  in
one or more of the Investment Funds.  Subject to such conditions and limitations
as the Committee in its absolute  discretion may prescribe from time to time for
application to all Participants on a uniform basis, a Participant may change his
or her investment direction with respect to future contributions or redirect the
investment of amounts  credited to his or her Accounts,  provided that notice of
such change is delivered to or in the manner  directed by the  Committee  within
such  reasonable  period of time  prior to the  effective  date  thereof  as the
Committee may require.

         Section 4.3  Valuation and Adjustment of Accounts. As of each Valuation
Date,  the Trustee  shall  determine  the fair market value of all assets of the
Trust with the value of the  assets of each  Investment  Fund  being  separately
determined.  On the  basis  of  such  valuations  and in  accordance  with  such
procedures as may be specified from time to time by the  Committee,  the portion
of each Account  invested in a particular  Investment  Fund shall be adjusted by
the  Committee to reflect its  proportionate  share of the income  collected and
accrued,  realized  and  unrealized  profits and losses,  expenses and all other
transactions  attributable to that particular  Investment Fund for the valuation
period then ended. The amount of any distribution forfeiture shall be determined
on the basis of the most recent valuation  preceding the date of distribution or
forfeiture, as the case may be.


                                   ARTICLE V.

                                     VESTING

         Section  5.1  Fully  Vested   Accounts.   The  amounts  credited  to  a
Participant's  Mesa Account and Rollover  Account (if any) shall be fully vested
at all times.

         Section 5.2  Vesting of Matching Account.  The amounts  credited to the
Matching Account of a Participant  shall become fully vested upon the occurrence
of any of the following  events while the Participant is in the employ of (or on



                                       12





authorized  leave of absence  from) an Employer or Affiliated  Company:  (i) the
completion of an Hour of Service by the  Participant  on or after the date he or
she attains age 60, (ii) the  Participant's  death,  or (iii) the  Participant's
Permanent  Disability.  Unless sooner vested pursuant to the preceding sentence,
the  amounts  credited  to  a  Participant's  Matching  Account  shall  vest  in
accordance with the following schedule:

            Period of Service
         Completed by Participant               Percentage Vested
         ------------------------               -----------------

            Less than 1 year                           None
            1 year                                      25%
            2 years                                     50%
            3 years                                     75%
            4 or more years                            100%


                                   ARTICLE VI.

                                  DISTRIBUTIONS

         Section  6.1  Time  and  Form  of   Distribution.   Distribution  to  a
Participant  or  beneficiary  under this Article shall be made or commence being
made no later  than 60 days after the close of the Plan Year in which the latest
of the following occurs: (i) the Participant's  Normal Retirement Date, (ii) the
tenth anniversary of the year in which the Participant  commenced  participation
in the Plan, or (iii) the  Participant's  separation  from the  employment of an
Employer  for any reason  other than his or her  transfer to the  employment  of
another  Employer or Affiliated  Company.  In addition and any provision of this
Plan to the  contrary  notwithstanding,  in the case of a  Participant  who is a
five-percent owner (as defined in Section 416(i) of the Code) or at the election
of any other  Participant  who  attains  age 70 1/2 prior to  January  1,  1999,
distribution to such Participant  under the Plan shall be made or commence being
made no later than April 1 of the calendar  year  following the calendar year in
which the Participant attains age 70 1/2. Distributions that commence being made
pursuant to the preceding  sentence to a Participant  who has not separated from
the  employment of an Employer or  Affiliated  Company shall be made pursuant to
Section 6.2 as if the  Participant  had  terminated  employment at such time and
shall  be made in  accordance  with the  minimum  distribution  requirements  of
Section 401(a)(9) of the Code and the regulations thereunder; provided, however,
that if a Participant  elects to waive payment in the form of a Qualified  Joint
and Survivor  Annuity in accordance  with Section 6.2, the  alternative  form of
distribution  shall be payment of the minimum amounts required to be distributed
pursuant to Section  401(a)(9) of the Code and the regulations  thereunder,  but
without recalculation of life expectancy, and with any amount remaining upon the
termination  of the  Participant's  employment or death to be paid in accordance
with Section 6.2 or Section 6.3, whichever is applicable,  but with any payments



                                       13





adjusted or  accelerated  as  necessary to satisfy the  requirements  of Section
401(a)(9) of the Code and the regulations thereunder.  Subject to the provisions
of this Article  requiring that  distributions be made in the form of an annuity
contract, distributions shall be made in cash. Any provision of this Plan to the
contrary  notwithstanding,  (A) all distributions from the Plan shall be made in
accordance with Section  401(a)(9) of the Code and the  regulations  thereunder,
and (B) all optional  forms of benefit  under the Plan and the Mesa Premium Plan
that are protected  benefits under Section  411(d)(6) of the Code shall continue
to be optional forms of benefit for  Participants to whom such optional forms of
benefit apply  notwithstanding any subsequent  amendment purporting to revise or
delete any such optional form of benefit.

         Section 6.2  Distribution of Retirement Benefit.

               (a)  Except  as  otherwise  provided in this  Section,  upon  the
         Retirement  or  Permanent  Disability  of  a  Participant,  the  Vested
         Interest of such  Participant  shall be distributed to such Participant
         by the  Trustee  at the  direction  of the  Committee  in the form of a
         Qualified  Joint and Survivor  Annuity  contract to be purchased from a
         company  selected by the Committee and commencing in payment as soon as
         practicable  unless the  Participant's  Vested Interest does not exceed
         $3,500 ($5,000  commencing  January 1, 1998), in which event it will be
         distributed to the Participant as soon as practicable  following his or
         her  Retirement  or  Permanent  Disability  in  the  form  of a  single
         distribution.   No  distribution  shall  be  made  upon  the  Permanent
         Disability of a Participant  prior to his or her Normal Retirement Date
         unless such Participant  consents to receive such  distribution or such
         Participant's Vested Interest does not exceed $3,500 ($5,000 commencing
         January 1, 1998).

               (b)  At least 30 days but not more than 90 days prior to the date
         the Qualified Joint and  Survivor  Annuity  contract  is to commence in
         payment to a Participant, the Committee shall  provide such Participant
         with a  written  explanation  of (i)  the terms  and conditions of  the
         Qualified Joint  and Survivor  Annuity,  (ii) his or her right to make,
         and  the  effect of, an  election to  waive  the  Qualified  Joint  and
         Survivor Annuity form of benefit, (iii) the rights of his or her spouse
         with  respect  to the  receipt  and waiver of the  Qualified  Joint and
         Survivor  Annuity,  and (iv) the right to make,  and the  effect  of, a
         revocation  of an election to waive the  Qualified  Joint and  Survivor
         Annuity.

               (c)  After receiving the  explanation described in (b) above, the
         Participant  may elect at  any  time during the 90-day period ending on
         the date the  annuity contract is to  commence in  payment to waive the
         Qualified  Joint and  Survivor  Annuity  form of  benefit  and also may
         revoke any such election during such period. Any such election to waive
         a Qualified  Joint and  Survivor  Annuity  form of benefit by a married
         Participant  will be effective  only if the spouse of such  Participant
         consents  in  writing  within  the 90- day  period  preceding  both the
         election and the optional form of benefit  selected by the  Participant
         and such consent is witnessed by a member of the  Committee or a notary
         public.


                                       14





               (d)  Any amount  payable  under the Plan  upon the  Retirement or
         Permanent  Disability  of a  Participant  who has  elected to waive the
         Qualified Joint and Survivor  Annuity form of benefit as provided above
         shall  be  distributed  to  such  Participant  by  the  Trustee  at the
         direction of the Committee in one of the following forms to be selected
         by the Participant:

               (i)  by payment of the entire amount in a single distribution;

                    (by payment of the entire amount in monthly,  quarterly,  or
                    annual installments over a specifically designated period of
                    time over a period of two  or more years, but not to  exceed
                    one or a combination of the  following periods: (i) the life
                    of  the  Participant,  (ii) the  lives  of  the  Participant
                    and  his  or  her  designated   beneficiary,  (iii) a period
                    certain not extending beyond  the  life  expectancy  of  the
                    Participant,  and (iv) a period certain not extending beyond
                    the  joint  life  and   last   survivor  expectancy  of  the
                    Participant and his or her designated beneficiary,  provided
                    that if a  Participant  who elects installment payments dies
                    prior to the distribution of the entire amount of his or her
                    vested interest, the  remaining  portion  thereof  shall  be
                    distributed  to  his  or  her  beneficiary or  beneficiaries
                    (determined in accordance  with  Section 6.3)  in  a  single
                    distribution; or

               (ii) by purchase  of  an  Alternate  Qualified Joint and Survivor
                    Annuity contract from a company selected by the Committee;

         provided,  however,  that the  consent of the  Participant's  spouse as
         provided above shall not be required if the Participant selects payment
         in the form of an Alternate Qualified Joint and Survivor Annuity.

               (e)  Distributions  pursuant to this  Section 6.2 shall  be  made
         or commence being made as soon as practicable but no later than 60 days
         following  the close of the Plan Year in which the event giving rise to
         a distribution occurred.

         Section 6.3  Distribution of Death Benefit.

               (a)  Except as  otherwise  provided  in this  Section,  upon  the
         death of a  Participant  who is  married,  the Vested  Interest of such
         Participant shall be distributed by the Trustee at the direction of the
         Committee  to his or her  surviving  spouse in the form of a  Qualified
         Preretirement  Survivor Annuity contract to be purchased from a company
         selected  by the  Committee  and  commencing  in  payment  as  soon  as
         practicable following the Participant's death.



                                       15





               (b)  The Committee shall provide  each such  married  Participant
         with a written  explanation  of the  Qualified  Preretirement  Survivor
         Annuity provided above,  including the Participant's right to waive the
         distribution of such Qualified  Preretirement Survivor Annuity with the
         consent  of his or her spouse  and to revoke  any such  waiver,  within
         whichever of the following  periods ends last: (i) the period beginning
         with the first day of the Plan  Year in which the  Participant  attains
         the age of 32 and ending with the close of the Plan Year  preceding the
         Plan  Year in which the  Participant  attains  the age of 35,  (ii) the
         one-year  period after the individual  becomes a Participant,  or (iii)
         the one-year  period after  separation from employment in the case of a
         Participant who separates before attaining age 35.

               (c)  Each  married  Participant  may elect  at  any time prior to
         such Participant's death to waive the Qualified  Preretirement Survivor
         Annuity  form of  benefit  provided  above  so that  his or her  entire
         benefit may be paid to his or her designated  beneficiary.  No election
         to waive the Qualified Preretirement Survivor Annuity will be effective
         upon  the  Participant's   death  unless  such  election  designates  a
         beneficiary  that  cannot  be  changed  without  spousal  consent,  the
         Participant's surviving spouse consents in writing to such election and
         such  consent is  witnessed  by a member of the  Committee  or a notary
         public. A married Participant may revoke any such election to waive the
         Qualified  Preretirement  Survivor  Annuity at any time prior to his or
         her death.

               (d)  The  amount  payable  under  the  Plan  upon  the death of a
         married  Participant  who has elected,  as provided above, to waive the
         Qualified   Preretirement   Survivor   Annuity  and  has  designated  a
         beneficiary, shall be distributed to the beneficiary designated by such
         Participant.  Such  designation  shall  be  made in  writing  on a form
         prescribed by the Committee and, when filed with the  Committee,  shall
         become  effective and remain in effect until changed by the Participant
         by the filing of a new beneficiary designation form with the Committee.
         If an unmarried Participant fails to so designate a beneficiary,  or in
         the  event  all  of  a  Participant's   designated   beneficiaries  are
         individuals who predecease such  Participant,  then the Committee shall
         direct the Trustee to distribute  the amount  payable under the Plan to
         such  Participant's  surviving  spouse,  if any,  but if none,  to such
         Participant's estate.

               (e)  All  distributions   under  this  Section,  other  than  the
         Qualified  Preretirement Survivor Annuity provided above, shall be made
         in  a  single   distribution   as  soon  as  practicable   following  a
         Participant's death;  provided,  however,  that a Participant may elect
         (or  if  the  Participant   does  not  elect,  his  or  her  designated
         beneficiary may elect) that distribution be made in monthly,  quarterly
         or annual  installments  over a period of two or more years, but not to
         exceed one or a combination of the following  periods:  (i) the life of
         the Participant's designated beneficiary,  or (ii) a period certain not
         extending  beyond the life expectancy of the  Participant's  designated
         beneficiary.



                                       16





               (f)  Distributions made pursuant to this  Section 6.3 in the form
         a Qualified  Preretirement Survivor  Annuity contract shall be made and
         such contract  shall provide for  commencement of payment no later than
         one  year  after  the  Participant's death. Distributions made pursuant
         to  this  Section  6.3 in any  other  form  shall  be made or  commence
         being made as soon as  practicable  but no later than 90 days following
         the close of the Plan Year in which the Participant's death occurs.

               (g)  Any   provision   of   this  Section  6.3  to  the  contrary
         notwithstanding,  the surviving spouse of any deceased  Participant may
         elect in writing after the Participant's  death to receive the benefits
         otherwise payable to such surviving spouse in one of the forms provided
         in Section  6.3(e)  above or in the form of a  Qualified  Preretirement
         Survivor  Annuity  commencing  in  payment as of such later date as the
         surviving  spouse  may  elect,   provided  that  such  delayed  payment
         commencement  date complies with the provisions of Section 401(a)(9) of
         the Code and the regulations thereunder.

         Section 6.4  Distribution of Separation from Employment  Benefit.  If a
Participant  separates from the employment of an Employer or Affiliated  Company
for any reason other than his or her Retirement,  Permanent Disability, death or
transfer to the  employment  of another  Employer  or  Affiliated  Company,  the
Accounts of such Participant shall be retained in trust and shall continue to be
credited  with  applicable  earnings as provided in Section  4.3, and the Vested
Interest of such  Participant  shall be distributed  to such  Participant by the
Trustee  at the  direction  of the  Committee  upon  such  Participant's  Normal
Retirement Date by payment of the entire amount in the form of a Qualified Joint
and Survivor  Annuity  contract to be purchased  from a company  selected by the
Committee and  commencing in payment as soon as practicable  thereafter  (or, if
the  Participant  dies prior to his or her Normal  Retirement  Date,  the Vested
Interest of such Participant under the Plan shall be distributed upon his or her
death in accordance  with Section 6.3);  provided,  however,  that (i) each such
Participant shall have the right to receive an early  distribution of his or her
Vested  Interest  under the Plan in the form of a Qualified  Joint and  Survivor
Annuity  contract to be purchased  from a company  selected by the Committee and
commencing in payment as soon as practicable  following  such election,  or upon
satisfaction of the notice and waiver  requirements of Section 6.2, in any other
form provided for  distributions  upon  Retirement  pursuant to Section 6.2, and
(ii) the  Committee  shall  require  an early  distribution  in cash of any such
Participant's  Vested  Interest which does not exceed $3,500 ($5,000  commencing
January 1, 1998).

         Section 6.5  Forfeitures.

               (a)  Unless sooner  forfeited  as provided  below,  any  unvested
         portion of the Matching Account of a Participant who separates from the
         employment  of an Employer or  Affiliated  Company for any reason other
         than his or her Retirement,  Permanent Disability, death or transfer to
         the  employment  of another  Employer or  Affiliated  Company  shall be
         forfeited upon the earlier of the date of such  Participant's  death or
         the date such  Participant  incurs five  consecutive One Year Breaks in
         


                                       17





         Service  unless  such  Participant is  reemployed  by  an  Employer  or
         Affiliated Company prior to such date.

               (b)  If a  Participant  receives a  distribution  of  his or  her
         Vested  Interest by the end of the second Plan Year  following the year
         in which his or her separation from  employment  occurred under Section
         6.4, any portion of such  Participant's  Matching  Account which is not
         vested  at the time of such  distribution  shall be  forfeited  at such
         time. If a Participant who separates from the employment of an Employer
         or Affiliated  Company for any reason other than his or her Retirement,
         Permanent  Disability,  death or transfer to the  employment of another
         Employer  or  Affiliated  Company,  is  not  entitled  to  receive  any
         distribution from the Plan due to the fact that such Participant has no
         Vested Interest,  such  Participant  shall be deemed to have received a
         distribution  from the Plan of his or her entire Vested  Interest under
         the Plan and any amount credited to such Participant's Matching Account
         shall be forfeited at the time of such separation from employment. If a
         Participant any portion of whose Matching Account is forfeited pursuant
         to this  subsection  (b) is reemployed as a Covered  Employee  prior to
         incurring five  consecutive  One Year Breaks in Service,  the amount so
         forfeited shall be restored to such  individual's  Matching Account out
         of current-year  forfeitures or, if such forfeitures are  insufficient,
         by an additional Employer contribution.

               (c)  If a  Participant  who has not yet incurred five consecutive
         One Year Breaks in Service  receives a  distribution  under Section 6.4
         after the end of the second Plan Year  following  the year in which his
         or her  separation  from  employment  occurred,  any  portion  of  such
         Participant's  Matching Account which is not vested at the time of such
         distribution  shall be retained in such  Account and shall be forfeited
         upon the  earlier of the date of such  Participant's  death or the date
         such  Participant  incurs five  consecutive  One Year Breaks in Service
         unless such  Participant  is  reemployed  by an Employer or  Affiliated
         Company prior to such date. If a  Participant  receives a  distribution
         from the Plan after the end of the second Plan Year  following the year
         in  which  his  or  her  separation  from  employment  occurred  and is
         reemployed by an Employer or Affiliated Company prior to incurring five
         consecutive  One Year Breaks in Service,  then the unvested  balance in
         his or her  Matching  Account  shall  be  transferred  to a  segregated
         account for such  Participant  and the amount that the  Participant  is
         entitled to receive from such  segregated  account as of any later date
         shall be an amount  equal to X, which  amount  shall be  determined  in
         accordance  with the following formula:  X = P (AB + D) - D, where P is
         the  Participant's  vested  percentage  at such later  date,  AB is the
         amount in his or her  segregated  account at such later date,  and D is
         the amount distributed to the Participant in connection with his or her
         earlier separation from employment.

         Section 6.6  Distributions  to   Minors   and   Persons   Under   Legal
Disability.  If any  distribution  under the Plan becomes  payable to a minor or



                                       18





other person under a legal disability,  such  distribution  shall be made to the
duly  appointed  guardian  or other legal  representative  of the estate of such
minor or person under legal disability.

         Section 6.7  Benefits Payable to Missing Participant or Beneficiary. If
the  Committee  cannot  locate  a  Participant  or  beneficiary  entitled  to  a
distribution  under  this  Plan  within  a  period  of three  years  after  such
Participant or beneficiary  becomes  entitled to the  distribution,  the amounts
credited to the Accounts of such Participant or beneficiary  shall be forfeited;
provided,   however,  that  if  a  claim  for  any  such  forfeited  amounts  is
subsequently  made by any person  entitled to the  distribution,  such forfeited
amounts shall be restored (without  adjustment for earnings or appreciation) out
of current-year  forfeitures,  or if such  forfeitures are  insufficient,  by an
additional Employer contribution.

         Section  6.8  Transfer  of  Eligible   Rollover   Distribution.   If  a
Participant is entitled to receive an eligible rollover distribution (as defined
in Section  402(c) of the Code and the  regulations  thereunder)  from the Plan,
such  Participant may elect to have the Committee direct the Trustee to transfer
the  entire  amount  of  such  distribution  directly  to any  of the  following
specified by such  Participant:  an individual  retirement  account described in
Section  408(a) of the Code,  an  individual  retirement  annuity  described  in
Section  408(b)  of the Code  (other  than an  endowment  contract),  a  defined
contribution  plan qualified under Section 401(a) of the Code the terms of which
permit rollover  contributions or an annuity plan described in Section 403(a) of
the Code.  If the  surviving  spouse of a deceased  Participant  is  entitled to
receive an eligible  rollover  distribution from the Plan, such surviving spouse
may elect to have the Committee direct the Trustee to transfer the entire amount
of such  distribution  directly  to  either  an  individual  retirement  account
described  in Section  408(a) of the Code or an  individual  retirement  annuity
described  in Section  408(b) of the Code  (other  than an  endowment  contract)
specified by such  surviving  spouse.  If an  alternate  payee under a qualified
domestic  relations  order (as  defined  in  Section  414(p) of the Code) is the
spouse or former spouse of the Participant  specified in the qualified  domestic
relations  order,  this Section  shall apply to such  alternate  payee as if the
alternate  payee were a  Participant.  A  distributee  of an  eligible  rollover
distribution  who is entitled to make an election under this Section may specify
that  some  portion  less  than  the  entire  amount  of  such  distribution  be
transferred in accordance with this Section.

          Section 6.9  Qualified  Domestic  Relations  Orders.  Any provision of
this Plan to the contrary notwithstanding:

               (a)  The  Committee   shall  establish  and  maintain   for  each
         alternate  payee named with respect to a  Participant  under a domestic
         relations  order which is determined by the Committee to be a qualified
         domestic  relations  order (as  defined in Section  414(p) of the Code)
         such  separate  Accounts as the  Committee  may deem to be necessary or
         appropriate to reflect such alternate  payee's interest in the Accounts
         of such Participant.  Such alternate payee's Accounts shall be credited
         with the alternate  payee's interest in the  Participant's  Accounts as
         


                                       19





         determined under such qualified domestic relations order. The alternate
         payee  may  change  investment  direction  with  respect  to his or her
         Account  balances in  accordance with Section 4.2 in the same manner as
         the Participant.

               (b)  Except to  the extent  otherwise  provided in  the qualified
         domestic  relations  order naming an alternate  payee with respect to a
         Participant,  (i) the alternate  payee may designate a beneficiary on a
         form  prescribed  by and  filed  with  the  Committee,  (ii) if no such
         beneficiary is validly designated or if the designated beneficiary is a
         person who  predeceases  the alternate  payee,  the  beneficiary of the
         alternate payee shall be the alternate  payee's  estate,  and (iii) the
         beneficiary of the alternate payee shall be accorded under the Plan all
         of the rights and privileges of the beneficiary of a Participant.

               (c)  An alternate payee named with respect to a Participant shall
         be entitled to receive a distribution  from the Plan in accordance with
         the  qualified  domestic  relations order naming such alternate  payee.
         Such distribution may  be made  only in a form provided under the  Plan
         and shall  include only  such amounts  as  are vested.  If a  qualified
         domestic  relations order so provides,  a lump sum  distribution of the
         total vested amount credited to the alternate  payee's  Accounts may be
         made  to the  alternate  payee  at any  time  prior  to  the  date  the
         Participant  named in such qualified  domestic  relations order attains
         his or her earliest retirement age (as defined in Section  414(p)(4)(B)
         of the Code).

               (d)  If  a  portion  of  any  unvested  amount  credited  to  the
         Matching  Account  of a  Participant  named in the  qualified  domestic
         relations  order is credited to the Matching  Account of the  alternate
         payee named in such qualified  domestic  relations  order,  the portion
         credited to such  Account of the  alternate  payee shall vest and/or be
         forfeited  at the same time and in the same  manner as such  Account of
         the Participant.


                                  ARTICLE VII.

                               PLAN ADMINISTRATION

         Section 7.1  Matching  Plan Committee.  The plan administrator  of  the
Plan shall be a Matching Plan Committee  composed of at least three  individuals
appointed by the Board of Directors of the Company. Each member of the Committee
so appointed  shall serve in such office until his or her death,  resignation or
removal by the Board of Directors of the Company.  The Board of Directors of the
Company  may remove any member of the  Committee  at any time by giving  written
notice  thereof to the members of the  Committee.  Vacancies  shall  likewise be
filled from time to time by the Board of Directors  of the Company.  The members
of the Committee shall receive no remuneration  from the Plan for their services
as Committee members.


                                       20





         Section  7.2  Powers, Duties  and  Liabilities  of the  Committee.  The
Committee  shall  have  discretionary  and  final  authority  to  interpret  and
implement the provisions of the Plan,  including without limitation authority to
determine  eligibility for benefits under the Plan, and shall perform all of the
duties and  exercise  all of the powers and  discretion  granted to it under the
terms of the Plan.  The Committee  shall act by a majority of its members at the
time in office and such action may be taken  either by a vote at a meeting or in
writing without a meeting.  The Committee may by such majority action  authorize
any one or more of its members to execute any document or documents on behalf of
the Committee,  in which event the Committee shall notify the Trustee in writing
of such action and the name or names of its member or members so  authorized  to
act.  Every  interpretation,  choice,  determination  or other  exercise  by the
Committee of any discretion given either expressly or by implication to it shall
be  conclusive  and binding upon all parties  directly or  indirectly  affected,
without  restriction,  however,  on the right of the Committee to reconsider and
redetermine such actions.  In performing any duty or exercising any power herein
conferred,  the  Committee  shall in no event perform such duty or exercise such
power  in  any  manner  which  discriminates  in  favor  of  Highly  Compensated
Employees.  The Employers  shall  indemnify and hold harmless each member of the
Committee against any claim, cost, expense (including attorneys' fees), judgment
or liability  (including any sum paid in settlement of a claim with the approval
of the  Employers)  arising out of any act or omission to act as a member of the
Committee appointed under this Plan, except in the case of willful misconduct.

         Section 7.3  Rules, Records and Reports.  The  Committee may adopt such
rules and procedures for the  administration  of the Plan as are consistent with
the terms hereof, and shall keep adequate records of the Committee's proceedings
and acts and of the status of the  Participants'  Accounts.  The  Committee  may
employ  such  agents,   accountants  and  legal  counsel  (who  may  be  agents,
accountants  or legal  counsel for an  Employer) as may be  appropriate  for the
administration  of the Plan. The Committee shall at least annually  provide each
Participant  with a report  reflecting  the status of his or her Accounts in the
Trust and shall  cause  such  other  information,  documents  or  reports  to be
prepared,  provided  and/or  filed  as may  be  necessary  to  comply  with  the
provisions of the Employee  Retirement  Income Security Act of 1974 or any other
law.

         Section 7.4  Administration Expenses and Taxes.  Unless otherwise  paid
by the Employers in their discretion,  the Committee shall direct the Trustee to
pay all  reasonable  and  necessary  expenses  (including  the  fees of  agents,
accountants and legal counsel)  incurred by the Committee in connection with the
administration of the Plan. Should any tax of any character  (including transfer
taxes) be levied upon the Trust assets or the income  therefrom,  such tax shall
be paid from and charged against the assets of the Trust.



                                       21





                                  ARTICLE VIII.

                            AMENDMENT AND TERMINATION

         Section 8.1  Amendment.  The Board of Directors  of  the  Company shall
have the right and power at any time and from time to time to amend  this  Plan,
in whole or in part, on behalf of all Employers.  Any such amendment made by the
Board of Directors  of the Company  shall be made by or pursuant to a resolution
duly adopted by the Board of Directors of the Company, and shall be evidenced by
such resolution or by a written instrument  executed by such person as the Board
of Directors of the Company shall  authorize for such purpose.  With the consent
of the Board of Directors of the Company and subject to such procedure as it may
prescribe,  the Board of  Directors  of each  Employer  shall have the right and
power at any time and from time to time to amend this Plan, in whole or in part,
with respect to the Plan's  application  to the  Participants  of the particular
amending  Employer  and the assets  held in the Trust for their  benefit,  or to
transfer  such assets or any  portion  thereof to a new trust for the benefit of
such Participants.  However, in no event shall any amendment or new trust permit
any portion of the trust fund to be used for or  diverted  to any purpose  other
than the exclusive  benefit of the  Participants  and their  beneficiaries,  nor
shall any amendment or new trust reduce a  Participant's  Vested  Interest under
the Plan.

         Section 8.2  Termination.  The Board of Directors of the Company  shall
have the  right and  power at any time to  terminate  this Plan on behalf of all
Employers,  or to terminate this Plan as it applies to the  Participants who are
or were employees of any particular  Employer,  by giving written notice of such
termination  to the  Committee  and Trustee.  Any  provision of this Plan to the
contrary  notwithstanding,  upon the  termination or partial  termination of the
Plan  as to any  Employer,  or in  the  event  any  Employer  should  completely
discontinue  making  contributions to the Plan without formally  terminating it,
all  amounts  credited  to the  Accounts of the  affected  Participants  of that
particular Employer shall be fully vested.


                                   ARTICLE IX.

                              TOP-HEAVY PROVISIONS

         Section 9.1  Top-Heavy   Definitions.   Unless   the   context  clearly
indicates otherwise, when used in this Article:

               (a)  "Top-Heavy Plan" means this Plan if, as of the Determination
         Date,  the  aggregate of the  Accounts of Key  Employees under the Plan
         exceeds  60% of the  aggregate  of the Accounts of all Participants and
         former  Participants  under the Plan. The aggregate of  the Accounts of
         any Participant or former  Participant  shall include any distributions
         (other than related rollovers or  transfers  from  the Plan  within the
         meaning of  regulations  under  Section  416(g) of the Code)  made from
         


                                       22





         such  individual's  Accounts  during  the Plan  Year or any of the four
         preceding Plan Years, but shall not include any unrelated  rollovers or
         transfers (within the  meaning  of regulations  under Section 416(g) of
         the Code) made to such individual's  Accounts  after December 31, 1983.
         The Accounts of any  Participant or former Participant who (i) is not a
         Key Employee for the  Plan Year in question  but who was a Key Employee
         in a prior Plan Year,   or (ii) has not  completed  an Hour of  Service
         during  the  five-year period ending  on the Determination  Date, shall
         not be taken  into account.  The  determination  of whether the Plan is
         a  Top-Heavy  Plan  shall be made after  aggregating all other plans of
         an Employer and any  Affiliated Company qualifying under Section 401(a)
         of the Code in which a Key Employee is a  participant  or which enables
         such a plan to meet the  requirements  of  Section  401(a)(4) or 410 of
         the Code,  and  after  aggregating any  other plan of  an  Employer  or
         Affiliated   Company,  which   is  not  already   aggregated,  if  such
         aggregation group would  continue to meet the  requirements of Sections
         401(a) (4) and  410  of the  Code  and if such  permissive  aggregation
         thereby  eliminates  the  top-heavy  status  of  any  plan  within such
         permissive aggregation group. The determination of whether this Plan is
         a Top-Heavy Plan shall be made in accordance with Section 416(g) of the
         Code.

               (b)  "Determination  Date" means,  for  purposes  of  determining
         whether the Plan is a Top-Heavy  Plan for a particular  Plan Year,  the
         last day of the preceding Plan Year.

               (c)  "Key  Employee"  means any  Employee  or  former  Employee
         (including a beneficiary  of such  Employee or former  Employee) who at
         any time during the Plan Year or any of the four  preceding  Plan Years
         is:

                    (1)  an officer of the Employer who has Compensation for any
               such  Plan  Year  greater  than 50% of the amount in effect under
               Section  415(b)(1)(A)  of the Code for such Plan
               Year;

                    (2)  one  of the  10  Employees   owning  (or  considered as
               owning  within  the  meaning  of  Section  318 of  the Code)  the
               largest   interests   in   excess  of  0.5%  in  an  Employer  or
               Affiliated  Company and having  Compensation for such  Plan  Year
               of more than the limitation in effect under Section  415(c)(1)(A)
               of the Code;

                    (3)  a person  owning (or  considered as  owning  within the
               meaning  of  Section  318  of the  Code)  more  than  5%  of  the
               outstanding stock of an Employer or stock possessing more than 5%
               of the total  combined voting power of all stock  of an Employer;
               or



                                       23





                    (4)  a person  who has  Compensation for such Plan Year from
               an Employer of more than $150,000  and who would be  described in
               paragraph (3) hereof if 1% were  substituted for 5% in each place
               it appears in such paragraph.

         For the purposes of applying Section 318 of the Code to this subsection
         (c), subparagraph (C) of Section 318(a)(2) of the Code shall be applied
         by substituting  5% for 50%. The rules of subsections  (b), (c) and (m)
         of Section 414 of the Code shall not apply for purposes of  determining
         ownership in an Employer under this subsection (c).

               (d)  "Non-Key  Employee"  means  any  Employee or former Employee
         (including a beneficiary  of such  Employee or former  Employee) who is
         not a Key Employee.

         Section 9.2  Minimum  Contribution Requirement.  Any  provision of this
Plan to the contrary  notwithstanding,  if the Plan is a Top-Heavy  Plan for any
Plan Year commencing after December 31, 1996, then the Employers will contribute
to the  Matching  Account  of each  Non-Key  Employee  who is both  eligible  to
participate  and in the employ of an Employer on the last day of such Plan Year,
an amount which, when added to the total amount of contributions and forfeitures
otherwise  allocable  under the Plan for such  Non-Key  Employee  for such year,
shall  equal  the  lesser  of  (i)  3% of  such  Non-Key  Employee's  Limitation
Compensation (Compensation for any Plan Year commencing after December 31, 1997)
for such year or (ii) the amount of contributions and forfeitures  (expressed as
a  percentage  of  Limitation  Compensation  (Compensation  for  any  Plan  Year
commencing  after  December  31,  1997))  allocable  under  the Plan for the Key
Employee for whom such  percentage is the highest for the Plan Year after taking
into account  contributions under other defined contribution plans maintained by
the Employer in which a Key Employee is a participant (as well as any other plan
of an Employer  which  enables such a plan to meet the  requirements  of Section
401(a)(4) or 410 of the Code);  provided,  however, that no minimum contribution
shall be made for a Non-Key Employee under this Section for any Plan Year if the
Employer  maintains  another  qualified  plan under  which a minimum  benefit or
contribution  is  being  accrued  or made  for such  Plan  Year for the  Non-Key
Employee in accordance  with Section 416(c) of the Code. A Non-Key  Employee who
is not a  Participant,  but for whom a  contribution  is made  pursuant  to this
Section,  shall be accorded all of the rights and  privileges  of a  Participant
under the Plan except that no contributions  (other than contributions  pursuant
to this Section)  shall be made for or on behalf of such Non-Key  Employee until
he or she meets the eligibility and participation requirements of Article II.


                                   ARTICLE X.

                        MISCELLANEOUS GENERAL PROVISIONS

         Section 10.1  Spendthrift Provision.   No  right  or  interest  of  any
Participant  or  beneficiary  under  the Plan may be  assigned,  transferred  or


                                       24





alienated,  in whole or in part,  either directly or by operation of law, and no
such right or interest shall be liable for or subject to any debt, obligation or
liability of such Participant or beneficiary;  provided,  however,  that nothing
herein shall prevent the payment of amounts from a Participant's  Accounts under
the Plan in  accordance  with the terms of a court order which the Committee has
determined  to be a qualified  domestic  relations  order (as defined in Section
414(p) of the Code).

         Section 10.2  Claims Procedure.  If any person  (hereinafter called the
"Claimant") feels that he or she is being denied a benefit to which he or she is
entitled under the Plan, such Claimant may file a written claim for said benefit
with any member of the  Committee.  Within 60 days of the  receipt of such claim
the Committee shall determine and notify the Claimant as to whether he or she is
entitled to such benefit.  Such notification shall be in writing and, if denying
the claim for benefit,  shall set forth the  specific  reason or reasons for the
denial,  make specific  reference to the pertinent  provisions of the Plan,  and
advise the  Claimant  that he or she may,  within 60 days of the receipt of such
notice,  in writing  request to appear  before  the  Committee  for a hearing to
review  such  denial.  Any  such  hearing  shall  be  scheduled  at  the  mutual
convenience of the Committee or its designated  representative and the Claimant,
and  at  such   hearing  the  Claimant   and/or  his  or  her  duly   authorized
representative  may examine any  relevant  documents  and present  evidence  and
arguments  to support  the  granting  of the benefit  being  claimed.  The final
decision of the Committee with respect to the claim being reviewed shall be made
within 60 days following the hearing  thereon and the Committee shall in writing
notify the Claimant of its final decision, again specifying the reasons therefor
and the pertinent  provisions of the Plan upon which such decision is based. The
final decision of the Committee shall be conclusive and binding upon all parties
having or claiming to have an interest in the matter being reviewed.

         Section 10.3 Maximum  Contribution  Limitation.  Any  provision of this
Plan to the contrary notwithstanding, the sum of (i) the Employer contributions,
(ii)  the  forfeitures,  and  (iii)  the  Participant  contributions  (excluding
rollover  contributions  and employee  contributions  to a  simplified  employee
pension  allowable as a deduction,  each within the meaning specified in Section
415(c)(2) of the Code),  allocated to a Participant  with respect to a Plan Year
shall in no event exceed the lesser of $30,000 (as adjusted  pursuant to Section
415(d) of the Code to take into account any  cost-of-living  increase) or 25% of
such  Participant's  Limitation  Compensation  (Compensation  for any Plan  Year
commencing  after December 31, 1997) for that year. For the purposes of applying
the  limitation  imposed  by this  Section,  each  Employer  and its  Affiliated
Companies shall be considered a single  employer,  and all defined  contribution
plans  (meaning plans  providing for individual  accounts and for benefits based
solely  upon the  amounts  contributed  to such  accounts  and any  forfeitures,
income,  expenses,  gains and losses  allocated to such  accounts)  described in
Section 415(k) of the Code, whether or not terminated, maintained by an Employer
or its  Affiliated  Companies  shall be  considered a single plan.  If the total
amount allocable to a Participant's  Matching Account for a particular Plan Year
would,  but for this  sentence,  exceed the  foregoing  limitation,  any amounts
allocated  to such  Participant's  Matching  Account in excess of the  foregoing



                                       25




limitation shall be credited to a suspense account and thereafter used to reduce
Matching  Contributions  for  such  Plan  Year  (and,  if  necessary,  the  next
succeeding year).

         Section 10.4  Employment Noncontractual. The establishment of this Plan
shall not enlarge or  otherwise  affect the terms of any  Employee's  employment
with an Employer and an Employer may terminate the employment of any Employee as
freely and with the same effect as if this Plan had not been adopted.

         Section  10.5  Limitations  on  Responsibility.  The  Employers  do not
guarantee or indemnify the Trust against any loss or  depreciation of its assets
which may occur,  nor  guarantee  the  payment  of any  amount  which may become
payable to a Participant or his or her beneficiaries  pursuant to the provisions
of this Plan. All payments to Participants and their beneficiaries shall be made
by the Trustee at the direction of the  Committee  solely from the assets of the
Trust  and the  Employers  shall  have no legal  obligation,  responsibility  or
liability for any such payments.

         Section  10.6  Merger or  Consolidation.   In no event shall this  Plan
be merged or  consolidated  into or with any  other  plan,  nor shall any of its
assets or liabilities be transferred to any other plan,  unless each Participant
would be  entitled  to  receive  a  benefit  if the plan in which he or she then
participates  terminated  immediately  following such merger,  consolidation  or
transfer,  which is equal to or  greater  than the  benefit he or she would have
been entitled to receive if the Plan had been  terminated  immediately  prior to
such merger, consolidation or transfer.

         Section 10.7  Applicable Law. This Plan shall be governed and construed
in  accordance  with the  internal  laws  (and not the  principles  relating  to
conflicts of laws) of the State of Texas except where superseded by federal law.

         IN WITNESS  WHEREOF,  this Plan has been  restated  by Pioneer  Natural
Resources  USA,  Inc.  this 11th day of  November,  1997,  to be effective as of
October 1, 1997.

                                          PIONEER NATURAL RESOURCES USA, INC.




                                          By    /s/ Larry Paulsen
                                            ------------------------------------
                                            Title: Vice President


                                      26





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