To repurchase more shares, accelerate its debt reduction program and to give it “enhanced firepower” for future exploration, Pioneer Natural Resources Co. on Thursday announced that it has sold the revenue associated with 2% of its reserves (20.5 MMboe) for about 8% of their enterprise value under two volumetric production payments (VPPs) totalling $593 million.

VPPs, which have been used rarely by oil and gas companies, in this case provide the buyers with ownership of a certain volume of oil and gas produced from the properties over a specific amount of time. The reserves being sold by Pioneer represent about 3% of the reserves in its five long-lived onshore U.S. fields. The production sold in 2006, the first full year covered by both VPPs, represents approximately 12% of the estimated 2006 production from these five fields.

CEO Scott Sheffield, who presided over a conference call on Thursday morning, said that the VPPs gave the company an arbitrage opportunity to “capture the true value of our long-lived assets using current oil and gas prices, and we are realizing proceeds equal to approximately 8% of the enterprise value currently being ascribed to Pioneer by the markets in exchange for about 2% of our reserves.”

Sheffield said the company had considered several financial alternatives as it laid out its long-range plans, including selling assets or setting up a master limited partnership, but in the end, decided that the VPPS offered the most value.

Pioneer estimates that selling 2% of the reserves for 8% of their enterprise value puts the reserves sold at about $7.16/boe of current enterprise value.

Through a VPP primarily related to its Hugoton natural gas field located in Kansas, Pioneer sold an overriding royalty interest for a five-year term beginning Feb. 1. The VPP, sold for $276 million, represents 58 Bcf of gas reserves. Pioneer noted that the Hugoton VPP covers only about 11% of its proved Hugoton reserves and about 80% of its Hugoton daily gas production, or 55% of its total daily Hugoton production, including the natural gas liquids (NGLs) produced from the field, during the term of the VPP.

Pioneer also sold an overriding royalty interest in a portion of its Spraberry oil field for a seven-year term beginning Jan. 1, 2006. This VPP, sold for $317 million, represents 10.8 million bbl of oil reserves. The barrels sold are 3% of the company’s proved Spraberry reserves and represent approximately 38% of Pioneer’s daily oil production from the field and about 17% of its total daily Spraberry production, including gas and NGLs, during the term of the VPP.

Subsidiaries of Wachovia Corp. arranged or provided all of the capital to the VPP purchaser. Pioneer said it plans to continue to evaluate VPPs, royalty trusts and other monetization “alternatives” to fund future opportunities.

In a research note, Lehman Brothers analyst Thomas Driscoll said, “A skeptic could say that the VPP is the same as a loan that will be retired from future cash flow (and as a matter of fact the company will book the proceeds as deferred revenue). The positive is that the buyer of the VPP has likely locked in forward oil and gas curve to determine the amount of the VPP — and prices on the forward curve are far higher than those that investors are willing to use to value E&P companies. We estimate that the positive valuation impact of locking in the current strong forward prices is roughly $100-150 million.”

Pioneer executives also offered a preview of its 4Q2004 and full-year 2004 results in the conference call Thursday. Among other things, the company said it replaced 441% of 2004 production at $10.48/boe. The board also has approved a new $300 million share repurchase program, and it has simplified its field fuel accounting treatment to reflect methods used by the majors and many independents.

The company will discuss its year-end results in a conference call on Feb. 8.

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