NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

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 by the merger of Parker & Parsley Petroleum Company ("Parker & Parsley") and MESA Inc. ("Mesa") in August 1997. The Company subsequently acquired 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 , during December 1997. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located principally in the Mid Continent, Southwestern and onshore and offshore Gulf Coast regions of the United States and in Argentina, Canada and South Africa.

In accordance with the provisions of Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB 16"), both the merger with Mesa and the acquisition of Chauvco were 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 prior to 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. The Company proportionately consolidates less than 100 percent-owned oil and gas partnerships in accordance with industry practice. The Company owns less than a 20 percent interest in the oil and gas partnerships that it proportionately consolidates. All material intercompany balances and transactions have been eliminated.

The Company determines the appropriate classification of investments in non-affiliated equity securities at the time of purchase and re-evaluates such determinations at each balance sheet date.

Investments in non-affiliated equity securities that have a readily determinable fair value are classified as "trading securities" if management's current intent is to hold them for only a short period of time; otherwise, they are accounted for as "available-for-sale" securities. The carrying value of trading securities and available-for-sale securities are adjusted to fair value as of each balance sheet date. Unrealized holding gains and losses are recognized for trading securities in interest and other revenue, in the case of unrealized holding gains, or other expense, in the case of unrealized holding losses, during the periods in which changes in fair value occur. Unrealized holding gains and losses would be recognized for available-for-sale securities as credits or charges to stockholders' equity during the periods in which changes in fair value occur, and would also be included as items of other comprehensive income (loss). The Company did not have any investments in available-for-sale securities during the years ended December 31, 1999, 1998 or 1997.

Investments in non-affiliated equity securities that do not have a readily determinable fair value are measured in the accompanying Consolidated Balance Sheet as of December 31, 1999 at the lower of their original cost less associated cash dividends received, or the net realizable value of the investment.

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, the

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Cash equivalents. Cash and cash equivalents include cash on hand and depository accounts held by banks.

Inventories. Inventories consist of lease and well equipment which are carried at the lower of cost or market, on a first-in first-out basis.

Oil and gas properties. The Company utilizes the successful efforts method of accounting for its oil and gas properties. 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 operations commence.

The Company accounts for its natural gas processing facilities activities as part of its oil and gas properties for financial reporting purposes. All revenues and expenses derived from third party gas volumes processed through the Company's natural gas processing facilities have been reported as components of oil and gas production costs. The capitalized costs of natural gas processing facilities are included in proved oil and gas properties and are depleted using the unit-of-production method.

Capitalized costs relating to proved properties are depleted using the unit-of-production method based on proved reserves as determined by the Company's 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.

Generally, capitalized costs of individual properties sold or abandoned are charged to accumulated depletion, depreciation and amortization with the proceeds from the sales of individual properties credited to property costs; no gain or loss is recognized until the entire amortization base is sold. However, gain or loss is recognized from the sale of less than an entire amortization base if the property costs are significant enough to materially impact the depletion rate of the remaining properties in the amortization base.

If significant, the Company accrues the estimated future costs to plug and abandon wells under the unit-of- production method. The charge, if any, is reflected in the accompanying Consolidated Statements of Operations and Comprehensive Loss 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, 1999 and 1998, the Company has recognized plugging and abandonment liabilities of $44.2 million and $44.5 million, respectively.

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", the Company reviews its long-lived assets to be held and used, including proved 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 estimated fair value of the asset.

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 the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such projects. If the quantity of potential reserves determined by such evaluations are not sufficient to fully

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

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.

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.

Environmental. The Company's 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, natural gas liquids ("NGL") 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, 1999 and 1998, entitlement liabilities totaled $15.5 million and $20.6 million, respectively, and entitlement assets totaled $33.0 million and $38.2 million, respectively.

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 F for the pro forma disclosures of compensation expense determined under the fair-value provisions of SFAS 123.

Hedging. The following criteria must be met in order for the Company to account for a financial instrument as a hedge of an existing asset, liability or forecasted transaction: an asset, liability or forecasted transaction must exist that exposes the Company to price, interest rate or foreign exchange rate risk that is not offset in another asset or liability; the hedging contract must reduce that price, interest rate or foreign exchange 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 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 hedged asset, liability or forecasted transaction, such that changes in the market value of the financial instrument will be offset by the effect of price, interest rate or foreign exchange rate changes on the exposed items.

Gains or losses realized from financial instruments that qualify as hedges are deferred as assets or liabilities until the underlying hedged asset, liability or transaction monetizes, matures or is otherwise recognized under generally accepted accounting principles. When recognized, hedge gains and losses are classified as components of the commodity prices, interest or foreign exchange rates that the financial instruments hedge. Derivative financial instruments that do not qualify as hedges are marked-to-market and recorded as assets or liabilities. Changes in the fair values of such instruments are recognized as other income or other expense during the periods in which their fair values change. See Note H for a description of the specific types of derivative transactions in which the Company participates.

Foreign currency translation. The financial statements of subsidiary entities whose functional currency is not the United States dollar are translated to United States 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-United States dollar denominated balances are recorded directly in stockholders' equity. Foreign currency transaction gains and losses are included in net loss.

                                                                        December 31,
                                                                 ------------------------
                                                                  1999     1998     1997
                                                                 ------   ------   ------
U.S. Dollar from Canadian Dollar - Balance sheet...............   .6915    .6534    .6997
U.S. Dollar from Canadian Dollar - Statements of operations....   .6700    .6740      N/A

Reclassifications. Certain reclassifications have been made to the 1998 and 1997 amounts to conform to the 1999 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 as of December 31, 1999 and 1998:

                                                                     1999                    1998
                                                              -------------------   -----------------------
                                                              Carrying    Fair      Carrying       Fair
                                                               Amount     Value      Amount        Value
                                                              --------   --------   ----------   ----------
                                                                            (in thousands)
Financial assets:
  Cash and cash equivalents.................................  $ 34,788   $ 34,788   $   59,221   $   59,221
  Investment in non-affiliated entity - trading securities..  $    -     $    -     $   12,000   $   12,000
  Investment in non-affiliated entity - fair value not
    readily determinable....................................  $ 30,000   $    -     $      -     $      -
Financial liabilities:
  Long-term debt:
     Practicable to estimate fair value:

       Lines of credit......................................  $825,000   $825,000   $1,239,032   $1,239,032
       8-7/8% senior notes due 2005.........................  $150,000   $149,189   $  150,000   $  144,108
       8-1/4% senior notes due 2007.........................  $149,482   $141,903   $  149,414   $  137,826
       6-1/2% senior notes due 2008.........................  $348,550   $297,313   $  348,418   $  284,442
       7-1/5% senior notes due 2028.........................  $249,909   $187,825   $  249,908   $  177,325
     Not practicable to estimate fair value:

       Other long-term debt.................................  $ 22,995   $    -     $   38,493   $      -

Derivative financial  instruments,  including off-balance
  sheet instruments (see Note H):
       Interest rate swaps..................................  $    -     $    -     $      (80)  $      966
       Foreign currency agreements..........................  $ (4,168)  $ (4,168)  $  (15,350)  $  (15,350)
       Commodity price hedges...............................  $  1,672   $(26,213)  $      (41)  $   26,548
       BTU swap agreements..................................  $(13,218)  $(13,218)  $  (15,172)  $  (15,172)
       Other non-hedge commodity derivatives ...............  $(13,259)  $(13,259)  $      -     $      -

Cash and cash equivalents, 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.

Investments in non-affiliated entities. During 1999, the Company received 2,307.693 shares of Prize Energy Corp. ("Prize") six percent convertible preferred stock ("Prize Preferred"), having a liquidation preference and estimated fair value of $30.0 million on the date acquired, in partial consideration for oil and gas properties, gas plants and other assets sold to Prize (see Note K for information specific to the assets sold to, and the investment in, Prize). As of December 31, 1999, Prize was a closely held, non-public entity. As such, the fair value of the Prize Preferred was not readily determinable. During 1999, the Company earned dividends of 69.23 additional shares of Prize Preferred.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

On February 9, 2000, Prize announced a merger with Vista Energy Resources Inc., whereby the common stock of the merged Prize entity began to publicly trade on the American Stock Exchange. Associated therewith, the Company's Prize Preferred was exchanged for 3,984,197 shares of Prize Series A 6% Convertible Preferred Stock ("Prize Senior A Preferred") having a liquidation preference and stated value of $7.81 per share, plus cumulative dividends accrued and unpaid. Each share of Prize Series A Preferred is convertible, at the option of the holder, into one share of Prize common stock. Under certain circumstances, Prize may redeem the Prize Series A Preferred at the stated value per share, unless the Company exercises its conversion rights. The fair value of the Prize Series A Preferred is not readily determinable.

As of December 31, 1998, the Company owned three million shares of common stock of a closely held, non- affiliated, public entity having a fair value of $12.0 million. The three million shares of common stock were received by the Company as partial consideration for the sale of an exclusive and irrevocable option to purchase certain oil and gas properties and other assets of the Company. During 1999, the Company's investment in the entity was increased to four million shares of common stock as a result of liquidation damages received by the Company from the non- affiliated entity (see Note K for information pertaining to the Company's transactions with the entity). This investment was classified by the Company as an investment in trading securities. As a result of declines in the fair value of this investment, other expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1999 and 1998, include non-cash mark-to-market charges of $11.9 million and $.8 million, respectively. The Company sold its investment in the common stock during 1999.

Long-term debt. The carrying amount of borrowings outstanding under the Company's line of credit (see Note D for definitions and descriptions 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.

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 swaps, interest rate cap agreements, foreign currency swap contracts and commodity price swap and option contracts. The fair value of interest rate swaps, interest rate cap agreements, foreign currency contracts and commodity price swap and option contracts are estimated from quotes provided by the counterparties to these instruments and represent the estimated amounts that the Company would expect to receive or pay to terminate the agreements. See Note H for a description of each of these instruments, including whether the derivative contract qualifies for hedge accounting treatment or is considered a speculative derivative instrument.

NOTE D.  Long-term Debt
                                                            December 31,
                                                      -----------------------
                                                         1999         1998
                                                      ----------   ----------
                                                            (in thousands)

Lines of credit.....................................  $  825,000   $1,249,984
8-7/8% senior notes due 2005........................     150,000      150,000
8-1/4% senior notes due 2007 (net of discount)......     149,482      149,414
6-1/2% senior notes due 2008 (net of discount)......     348,550      348,418
7-1/5% senior notes due 2028 (net of discount)......     249,909      249,908
Other...............................................      22,995       27,541
                                                       ---------    ---------
                                                       1,745,936    2,175,265
Less current maturities.............................         828      306,521
                                                       ---------    ---------
                                                      $1,745,108   $1,868,744
                                                       =========    =========

2000............................................  $    828
2001............................................  $    -
2002............................................  $825,000
2003............................................  $    518
2004............................................  $    571
Thereafter......................................  $919,019

Lines of credit. As of December 31, 1999, the Company has a credit facility (the "Credit Facility") with a syndicate of banks (the "Banks") with commitments aggregating $939.6 million and outstanding borrowings of $825 million. Advances under the Credit Facility are required to be paid no later than August 7, 2002.

Advances on the Credit Facility bear interest at the option of the Company, based on (a) the prime rate of NationsBank of Texas, N.A. (8.50 percent at December 31, 1999), (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 Company. The interest rate on LIBOR Rate advances includes an interest rate margin component that is determined by a grid that is based on the Company's senior unsecured long-term public debt rating. As of December 31, 1999, the future maximum interest rate margin on LIBOR Rate advances is 187.5 basis points.

The Credit Facility contains various debt convenants, the most restrictive being the maintenance of a ratio of outstanding Company debt to earnings before interest, depletion, depreciation, amortization, income tax, exploration and abandonment and other non-cash expenses ("EBITDAX") not to exceed 4.25 to one through March 31, 2000, and 3.5 to one thereafter. Other restrictive compliance requirements include limits on the incurrence of additional indebtedness and certain types of liens and restrictions as to merger, sale or transfer of assets and transactions without the Banks' consent. The Company's obligations under the Credit Facility are also guaranteed by Pioneer Natural Resources USA, Inc. ("Pioneer USA") and certain other United States subsidiaries, and are secured by a pledge of a portion of the capital stock of certain non-United States subsidiaries.

During the first quarter of 1999, the Company and the Banks executed amendments to the Credit Facility that provided for the consolidation of the Company's $276 million Canadian subsidiary term loan with and into the Credit Facility. The amendments also provided for a $410 million reduction in loan commitments by December 31, 1999, an increase in the maximum interest rate margin on LIBOR Rate advances to 250 basis points including commitment utilization fees and the debt covenants outlined above. The Company met each of the requirements of the amended Credit Facility during 1999.

Senior notes. The Company's senior notes are general unsecured obligations 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 of its operations through subsidiaries; consequently, the senior notes issuances are structurally subordinated to all obligations of its subsidiaries. Pioneer USA has fully and unconditionally guaranteed the senior note issuances. Interest on the Company's senior notes is payable semi-annually.

Extraordinary items. 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. During 1997, the Company redeemed approximately 91 percent of the 11-5/8% senior subordinated discount notes due 2006 and approximately 98 percent of the 10-5/8% senior subordinated notes due 2006 (the "10-5/8% Notes") for a purchase price of $829.90 and

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

$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.

In addition to the extraordinary loss resulting from the Tender Offer, the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 1997 includes a $1.5 million (net of a related tax benefit of $800 thousand) non-cash charge for an extraordinary loss on the early extinguishment of debt resulting from the merger of Parker & Parsley and Mesa. This extraordinary loss relates to capitalized issuance fees associated with Parker & Parsley's previously existing bank credit facility which was replaced by the Credit Facility .

Interest expense. The following amounts have been charged to interest expense for the years ended December 31, 1999, 1998 and 1997:

                                                               1999       1998       1997
                                                             --------   --------   ---------
                                                                     (in thousands)
Cash payments for interest................................   $150,929   $135,811   $  65,740
Accretion/amortization of discounts or premiums on loans..      8,401     10,688       7,348
Amortization of capitalized loan fees.....................      2,686      1,142       1,177
Net change in accruals....................................      8,328     16,644       3,285
                                                              -------    -------     -------
                                                             $170,344   $164,285   $  77,550
                                                              =======    =======    ========

NOTE E. Related Party Transactions

Activities with affiliated partnerships. The Company, through its wholly-owned subsidiaries, has in the past sponsored certain affiliated partnerships, including 35 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 percent, 1.5375 percent and 1.865 percent, respectively, of the costs and revenues attributable to the Company's interest in the wells that 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, 1999, 1998 and 1997:

                                                                         1999     1998     1997
                                                                        ------   ------   ------
                                                                             (in thousands)
Receipt of lease operating and supervision charges  in accordance
  with standard industry operating agreements........................   $9,059   $9,021   $8,547
Reimbursement of general and administrative expenses.................   $  744   $  739   $1,476

Prize divestiture. As further disclosed in Note K, the Company sold certain oil and gas properties, gas plants and other assets to Prize during 1999. Associated with these transactions, the Company received $245.0 million of proceeds, including the 2,307.693 shares of Prize Preferred valued at $30.0 million. The board of directors of Prize is comprised of six directors, which include Mr. Philip P. Smith, the Chief Executive Officer; Mr. Kenneth A. Hersh; Mr. Lon C. Kile; two members of the Company's executive management committee; and, a member who is unrelated to the Company. Messrs. Smith and Hersh were members of the Board of Directors of the Company and resigned their positions with the Company during the second quarter of 1999. Additionally, Mr. Lon C. Kile resigned his position as Executive Vice President of the Company to accept the position of President and Chief Operating Officer of Prize. The sale of the assets to Prize was initiated through an auction process which, upon receipt of Prize's initial offer, was placed under the supervision of a special independent committee (comprised of outside directors unrelated to Prize) of the Company's Board of Directors. The independent committee reviewed and considered all offers presented to the Company for the purchase of the assets acquired by Prize. The Prize offer was approved by the special independent committee as being the best offer presented (see Notes C and K for information pertaining to the divestiture of assets to Prize and the Company's investment in Prize).

Consulting fee. Effective January 1, 1999, the Company entered into an amended and restated agreement with Rainwater, Inc., whereby the Company will pay Rainwater, Inc. $300,000 per year and reimburse Rainwater, Inc. for certain expenses in consideration for certain consulting and financial analysis services provided to the Company by Rainwater, Inc. and its representatives. The term of this agreement expires on December 31, 2003. During 1999, 1998 and 1997, consulting and financial analysis services provided to the Company totaled $325,000, $400,000 and $100,000; respectively, plus expenses. Richard E. Rainwater, who serves on the Company's Board of Directors, is the sole shareholder of Rainwater, Inc.

NOTE F. Incentive Plans

Retirement Plans

Deferred compensation retirement plan. 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 percent of their base salary. The Company will then provide a matching contribution of 100 percent of the officer's and key employee's contribution limited to the first 10 percent of the officer's base salary and eight percent 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.

In December 1998, the Company received notification that an investment fund group had acquired beneficial ownership of greater than 20 percent of the Company's common stock. Pursuant to the then existing provisions within the Company's deferred compensation retirement plan, if a third party acquired 20 percent or more of the Company's common stock certain change of control provisions contained within the plan were triggered. Accordingly, in December 1998, the Compensation Committee of the Board of Directors determined that a change of control had occurred, effective September 30, 1998, under the deferred compensation retirement plan. Consequently, all of the contributions to the deferred compensation retirement plan from August 1997 to December 15, 1998 were immediately vested and distributed.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

401(k) plan. The Pioneer Natural Resources USA, Inc. 401(k) Plan (the "401(k) Plan") is a defined contribution pension plan established under the Internal Revenue Code Section 401. All regular full-time and part-time employees of Pioneer USA are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Participants may contribute an amount of not less than two percent nor more than 12 percent of their annual salary into the 401(k) Plan. Each participant's account is credited with the participant's contributions and an allocation of the 401(k) Plan's earnings. Participants are immediately fully vested in their account balances.

Matching plan. The Pioneer Natural Resources USA, Inc. Matching Plan (the "Matching Plan") is a money purchase pension plan which accumulates benefits to participants. All regular full-time and part-time employees of Pioneer USA become eligible to participate in the Matching Plan concurrent with their eligibility to participate in the 401(k) Plan. All Matching Plan contributions are made in cash by Pioneer USA in amounts equal to 200 percent of a participant's contributions to the 401(k) Plan that are not in excess of five percent of the participant's basic compensation (the "Matching Contribution"). Each participant's account is credited with their Matching Contribution and an allocation of Matching Plan earnings. Participants proportionately vest in their account balances over a four year period, at the end of which they are fully vested in their account balances. During the years ended December 31, 1999, 1998 and 1997, the Company recognized compensation expense of $508 thousand, $742 thousand and $497 thousand, respectively, as a result of Matching Contributions.

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 percent 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 stock-based plan for the directors, officers or employees of the Company.

Pursuant to the provisions within the Company's Long-Term Incentive Plan, if a third party acquires 40 percent or more of the Company's common stock, certain change of control provisions contained within the plan are triggered. In December 1998, the Compensation Committee of the Board of Directors determined that a change of control had occurred, effective September 30, 1998, under the Long-Term Incentive Plan. Consequently, all awards granted under the Long-Term Incentive Plan since its inception in August 1997 through September 30, 1998 were immediately vested and any restrictions were canceled.

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, 1999 and 1998:

                                                                                      December 31,
                                                                                   1999           1998
                                                                               -----------   --------------
Shares outstanding..........................................................   100,339,583   100,296,223
Options outstanding.........................................................     4,832,412     2,939,183
                                                                               -----------   -----------
                                                                               105,171,995   103,235,406
                                                                               ===========   ===========
Maximum shares/options allowed under the Long-Term Incentive Plan...........    10,517,200    10,323,541
Less:  Outstanding awards under Long-Term Incentive Plan....................    (4,832,412)   (2,939,183)
       Outstanding options under Mesa 1991 stock option plan................      (149,547)     (407,284)
       Outstanding options under Mesa 1996 incentive plan...................      (372,855)     (422,854)
       Outstanding options under Parker & Parsley long-term incentive plan..      (887,075)     (810,709)
                                                                               -----------   -----------
Shares/options available for future grant...................................     4,275,311     5,743,511
                                                                               ===========   ===========

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

Restricted stock awards

Non-employee directors. On May 20, 1999, the Company's Long-Term Incentive Plan was amended to eliminate the automatic award of restricted stock to non-employee directors in payment of their annual retainer fees. The effect of the amendment was to provide the Compensation Committee of the Board of Directors with the authority to determine what awards, if any, non-employee directors will receive and what the terms of those awards will be and, alternatively, to award stock options to non-employee directors in payment of their annual retainer fees. During 1999, the Company awarded stock options to the non-employee directors in payment of their annual retainer fees. The options awarded were determined by dividing the annual retainer fees by the value of one option on the last business day of the month in which the fee was paid. The option values were determined using the Black-Scholes method (see "Stock Option Awards", below). Prior to this amendment, on the last business day of the month in which the annual meeting of the stockholders of the Company was held, each non-employee director automatically received an award of common stock equal to 50 percent of their annual retainer fee. These awards were made in lieu of an amount of cash equal to 50 percent of the annual retainer fee. In May 1998 and August 1997, the Company issued an aggregate 17,306 shares and 5,939 shares, respectively, to non-employee directors pursuant to this arrangement.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.

Officers and key employees. The Company, at its sole discretion, may pay annual bonuses awarded to selected officers and key employees either 100 percent in cash or 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. During 1997, the Company awarded restricted stock pursuant to this program. The 1997 awards were 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 was paid in cash. The number of shares of restricted stock that were awarded pursuant to the annual bonus program were 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 vested one year after the date it was issued, subject to transfer restrictions that lapsed 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 received 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 81,300 shares of restricted stock at a price of $22.375 pursuant to the 1997 annual bonus program. The Company elected not to award any restricted stock in conjunction with the 1999 or 1998 annual bonus programs.

During 1998 and 1997, the Company made other Long-Term Incentive Plan awards of 38,480 and 470,975 shares, respectively, to certain officers and key employees. The shares awarded are subject to vesting period and transfer restrictions.

Stock Option Awards

The Company has a program of awarding semi-annual stock options to its officers and employees and annual stock options to its directors, as part of their annual compensation. This program provides for annual awards at an exercise price based upon the closing sales price of the Company's common stock on the day prior to the date of grant. The awards vest over an 18 month or three year schedule and provide a five year exercise period from each vesting date. The Company granted 1,985,193; 2,146,553 and 1,716,625 options under the Long-Term Incentive Plan during 1999, 1998 and 1997, respectively.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 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.

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 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 1999, 1998 and 1997:

                                        For the Year Ended       For the Year Ended       For the Year Ended
                                         December 31, 1999        December 31, 1998        December 31, 1997
                                      -----------------------  -----------------------  --------------------
                                                  Weighted                Weighted                Weighted
                                       Number      Average      Number     Average     Number      Average
                                      of Shares     Price     of Shares    Price      of Shares     Price
                                      ---------   ---------   ---------   ---------   ---------   --------
Restricted stock awards:
  Outstanding, beginning of year..          -     $     -       476,914   $   37.88      79,819   $  23.35
  Shares granted..................        6,200   $   29.56     137,086   $   21.13     506,786   $  37.43
  Shares forfeited................          -     $     -       (12,585)  $   35.67         -     $    -
  Lapse of restrictions...........       (6,200)  $   29.56    (601,415)  $   34.11    (109,691)  $  25.66
                                      ---------               ---------               ---------
  Outstanding, end of year........          -     $     -           -     $     -       476,914   $  37.88
                                      =========               =========               =========

Stock option 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 losses and net losses per share would have been adjusted to the pro forma amounts indicated below:

                                           For the Year Ended  December 31,
                                          ---------------------------------
                                             1999        1998       1997
                                          ---------   ---------   ---------
                                       (in thousands, except per share amounts)

Net loss................................  $(25,269)   $(775,349)  $(893,729)
Basic and diluted net loss per share....  $   (.25)   $   (7.75)  $  (17.20)

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 1999, 1998 and 1997:

                                             For the Year Ended  December 31,
                                               ---------------------------
                                                 1999      1998      1997
                                               -------   -------   -------
Risk-free interest rate....................      6.59%     5.45%     5.72%
Expected life..............................    6 years   6 years   7 years
Expected volatility........................        48%       36%       36%
Expected dividend yield....................        -        .56%      .30%

                                          For the Year Ended       For the Year Ended        For the Year Ended
                                           December 31, 1999        December 31, 1998         December 31, 1997
                                       -----------------------   ------------------------  ---------------------
                                                     Weighted                 Weighted                 Weighted
                                          Number      Average      Number      Average      Number      Average
                                        of Shares      Price     of Shares      Price     of Shares      Price
                                        ----------   ---------   ----------   ---------   ----------   --------
Non-statutory stock options:
  Outstanding, beginning of year.......  4,580,030   $   24.83    3,541,145   $   31.63    1,362,629   $  24.04
    Options granted....................  1,945,135   $    9.10    2,146,553   $   19.22    1,744,704   $  34.00
    Options assumed....................        -     $     -            -     $     -        928,478   $  33.97
    Options forfeited..................   (256,576)  $   38.29   (1,106,835)  $   35.75       (1,500)  $  21.33
    Options exercised..................    (26,700)  $    5.81         (833)  $   14.25     (493,166)  $  23.45
                                        ----------               ----------               ----------
  Outstanding, end of year.............  6,241,889   $   19.45    4,580,030   $   24.83    3,541,145   $  31.63
                                        ==========               ==========               ==========
  Exercisable at end of year...........  4,038,341   $   24.62    3,937,113   $   26.60    1,824,520   $  29.37
                                        ==========               ==========               ==========
Weighted average fair value of options
  granted during the year.............. $     5.14               $     8.21               $    16.10
                                         =========                =========                =========

The following table summarizes information about the Company's stock options outstanding at December 31, 1999:

                                     Options Outstanding                           Options Exercisable
                  -----------------------------------------------------   -------------------------------------
                       Number         Weighted Average      Weighted                                Weighted
   Range of        Outstanding at        Remaining           Average       Number Exercisable        Average
Exercise Prices   December 31, 1999   Contractual Life   Exercise Price   at December 31, 1999   Exercise Price
---------------   -----------------   ----------------   --------------   --------------------   --------------
   $   5-11           1,251,868           6.4 years         $   7.59               40,210           $  10.82
   $  12-18           2,114,621           5.0 years         $  14.76            1,122,731           $  16.28
   $  19-26             844,628           3.7 years         $  22.51              844,628           $  22.51
   $  27-30           1,932,370           3.5 years         $  29.65            1,932,370           $  29.65
   $  31-82              98,402           4.4 years         $  44.86               98,402           $  44.86
                    -----------                                                ----------
                      6,241,889                                                 4,038,341
                    ===========                                                ==========

During 1999, the Company recognized $.2 million of costs related to its incentive plans in other expense. The Company recognized $3.9 million and $3.3 million in general and administrative compensation expense related to its Incentive Plans during 1998 and 1997, respectively. During 1998, the Company also recognized $9.6 million in other expense related to restricted stock awards that were immediately vested as a result of the Long-Term Incentive Plan change in control provisions and $3.1 million of reorganization costs related to its Incentive Plans.

NOTE G. Commitments and Contingencies

Severance agreements. The Company has entered into severance agreements with its officers, subsidiary company officers and certain key employees. Salaries and bonuses for the Company's officers are set independent of this agreement by the Compensation Committee for the parent company officers and the Management Committee for subsidiary company officers and key employees. These committees can grant increases or reductions to base salary at their discretion. The current annual salaries for the parent company officers, the subsidiary company officers and key employees covered under such agreements total approximately $8.2 million.

Either the Company or the officer/key employee may terminate the officer's or key employee's employment under the severance agreement at any time. The Company must pay the officer or key employee 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 or key employee an amount

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

equal to one year's base salary and continue health insurance for the officer or key employee and his or her immediate family for one year if the Company terminates employment without cause or if the officer or key employee terminates employment with good reason, which occurs when reductions in the officer's or key employee's base annual salary exceed specified limits or if, in the case of officers, the officer is demoted to an officer position junior to 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 or key employee without cause or if the officer or key employee 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 and key employees an amount equal to two times the officer's or key employee's base salary and continue health insurance for the officer or key employee and his immediate family for one year. If the officer or key employee 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 or key employee is required to move, then the Company must pay the officer or key employee one year's base salary and continue health insurance for the officer or key employee and his or her immediate family for one year. Officers and key employees 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 percent) dating from July 1, 1967. 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 percent and 60 percent, 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"

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

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 Court of Appeals, where oral arguments were heard in December 1998. The Court's decision regarding this litigation could be announced at any time.

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 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.

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)

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

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. 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. As of December 31, 1999 and 1998, the Company had set aside $31.3 million and $29.7 million, respectively, including accrued interest, in an escrow account and had corresponding obligations for this litigation recorded in other current liabilities in the accompanying Consolidated Balance Sheets. In addition, during 1998, the Company paid $1.4 million to a pipeline in settlement of the pipeline's share of the total initial obligation.

Lease agreements. The Company leases equipment and office facilities under noncancellable operating leases on which rental expense for the years ended December 31, 1999, 1998 and 1997 was approximately $6.9 million, $8.9 million and $3.7 million, respectively. Future minimum lease commitments under noncancellable operating leases at December 31, 1999 are as follows (in thousands):

       2000.........................................     $   6,765
       2001.........................................     $   5,684
       2002.........................................     $   4,517
       2003.........................................     $   4,070
       2004.........................................     $   3,549
       Thereafter...................................     $   3,388

NOTE H.     Derivative Financial Instruments

The Company uses derivative financial instruments to manage interest rate, foreign exchange rate and commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counterparties. 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.

The Company is a party to certain derivative financial instruments that do not qualify for hedge accounting treatment. Such instruments are marked-to-market at the end of each reporting period during their respective lives. The associated effects on the Company's results of operations in future periods could be significant. Those instruments not qualifying for hedge accounting are designated under the heading "Mark-to-Market Derivatives" below.

Hedge Derivatives

Interest rate swap agreements. During 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 had a term of three years, effectively converted a portion of the Company's fixed-rate borrowings into floating-rate obligations. The weighted average fixed rate received by the Company over the term of these agreements was 6.62 percent, while the weighted average variable rate paid by the Company for the years ended December 31, 1999, 1998 and 1997 was 5.16 percent, 5.75 percent and 5.78 percent, respectively. The interest rate swap agreements expired in May and June, 1999. The Company was also party to an interest rate swap agreement for an aggregate amount of $250 million with one counterparty. This agreement, which expired in August 1998, effectively converted a portion of the Company's floating- rate borrowings into fixed-rate obligations. The effect of this agreement was to provide the Company with an interest rate of 6.23 percent on $250 million in nominal principal amount for the term of the agreement. The accompanying Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 1999, 1998 and 1997 include a reduction in interest expense of $849 thousand, $356 thousand and $847 thousand, respectively, associated with these rate swap agreements.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

During 1997, the Company entered into two agreements with a counterparty that obligated the Company to sell United States Treasury securities at a designated point in the future. The face amount of the United States Treasury securities was $300 million at interest rates ranging from 6.05 percent to 6.33 percent. These agreements effectively converted 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 is being amortized over the life of the Company's Credit 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 sales contracts governing the Company's oil production have been tied directly or indirectly to the New York Mercantile Exchange ("NYMEX") prices.

The following table sets forth the Company's outstanding oil hedge contracts as of December 31, 1999. During the first quarter of 2000, the Company terminated June 2000 through December 2000 swap contracts for notional volumes of 9,000 Bbls per day and the 2001 collar contracts (and associated sold puts) for notional volumes of 8,000 Bbls per day, at a total cost of $16.1 million. Including these costs, the Company has deferred oil hedge losses of $14.3 million and $3.7 million that will be recognized during 2000 and 2001, respectively.

                                                                                                       Yearly
                                            First         Second         Third          Fourth      Outstanding
                                         Quarter         Quarter        Quarter         Quarter         Average
                                     -------------   -------------   ------------   --------------   -------------
Daily oil production:
   2000 - Swap Contracts

     Volume (Bbl)..................          9,626           9,538          9,478            9,435           9,519
     Price per Bbl.................  $       16.50   $       16.51   $      16.51    $       16.52   $       16.51

   2000 - Collar Contracts *
     Volume (Bbl)..................          7,713           7,714          7,898            7,977           7,826
     Price per Bbl.................  $17.45-$20.66   $17.44-$20.66   $17.48-$20.71   $17.50-$20.74   $17.47-$20.69

   2001 - Collar Contracts**
     Volume (Bbl)..................          8,000           8,000          8,000            8,000           8,000
     Price per Bbl.................  $18.44-$21.57   $18.44-$21.57   $18.44-$21.57   $18.44-$21.57   $18.44-$21.57

* Concurrent with the Company's purchase of the year 2000 collar contracts, the Company sold year 2000 put contracts to the counterparties for average notional contract volumes of 6,997 Bbls per day at a weighted average index price of $14.29 per Bbl. Consequently, if the weighted average year 2000 index price falls below $14.29 per Bbl, the Company will receive the weighted average index price for the notional contract volumes, plus $3.18 per Bbl. The counterparties have the contractual right to extend contracts for notional volumes of 5,000 Bbls per day through year 2001 at weighted average per Bbl strike prices of $17.00 - $20.09 for the collar contracts and $14.00 for the put contracts.

** Concurrent with the Company's purchase of the year 2001 collar contracts, the Company sold 2001 put contracts to the counterparties for equal notional contract volumes at a weighted average index price of $15.44 per Bbl. Consequently, if the weighted average year 2001 index price falls below $15.44 per Bbl, the Company will receive the weighted average index price for the notional contract volumes, plus $3.00 per Bbl.

                                                     Year Ended December 31,
                                                  ---------------------------
                                                    1999      1998      1997
                                                  -------   -------   -------
Average price reported per Bbl..................  $ 15.36   $ 13.08   $ 18.51
Average price realized per Bbl..................  $ 16.23   $ 11.93   $ 19.09
Addition (reduction) to revenue (in millions)...  $ (13.4)  $  24.8   $  (7.9)

Natural Gas Liquids. During the years ended December 31, 1999 and 1998, the Company did not enter into any natural gas liquids hedge contracts. The Company reported and realized an average natural gas liquids price of $11.64 per Bbl during the year ended December 31, 1999. During the year ended December 31, 1998, the Company reported an average natural gas liquids price of $8.90 per Bbl. During the 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.

Natural Gas. The Company employs a policy of hedging a portion of its 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, 1999. Prices included herein represent the Company's weighted average index price per MMBtu. During the first quarter of 2000, the Company terminated Collar Contracts (and associated sold puts) for notional volumes of 45,000 MMBtu per day for the nine months ended December 31, 2000, and 60,000 MMBtu per day for the year 2001, at a cost of $4.6 million. Including this cost, the Company has deferred gas hedge losses of $4.1 million and $2.5 million that will be recognized during 2000 and 2001, respectively. In addition to the hedge contracts shown below, certain counterparties have the contractual right to sell year 2001, 2002, and 2003 swap contracts to the Company for notional contract volumes of 49,223; 12,500; and 10,000 Mcf per day, respectively, at weighted average strike prices of $2.21; $2.52; and $2.58 per MMBtu, respectively.

                                                                                                        Yearly
                                                 First        Second        Third         Fourth      Outstanding
                                                Quarter       Quarter       Quarter       Quarter       Average
                                              -----------   -----------   -----------   -----------   -----------
Daily gas production:
   2000 - Swap Contracts
     Volume (Mcf)..........................         1,318           -             -            -              328
     Index price per MMBtu.................   $      3.00   $       -     $       -     $      -      $      3.00

   2000 - Collar Contracts*
     Volume (Mcf)..........................        68,059       103,223       103,223       100,571        93,814
     Index price per MMBtu.................   $2.07-$2.61   $2.07-$2.61   $2.07-$2.61   $2.07-$2.63   $2.07-$2.62

   2001 - Collar Contracts**
     Volume (Mcf)..........................        60,000        60,000        60,000        60,000        60,000
     Index price per MMBtu.................   $2.25-$2.74   $2.24-$2.58   $2.24-$2.58   $2.25-$2.68   $2.25-$2.64

   2002 - Swap Contracts
     Volume (Mcf)..........................        10,000        10,000        10,000        10,000        10,000
     Index price per MMBtu.................   $      2.42   $      2.42   $      2.42   $      2.42   $      2.42

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

* Concurrent with the Company's purchase of the year 2000 collar contracts, the Company sold year 2000 put contracts to the counterparties for an equal volume at a weighted average index price of $1.78 per MMBtu. Consequently, if the weighted average year 2000 index price falls below $1.78 per MMBtu, the Company will receive the weighted average index price for the notional contract volumes, plus approximately $.29 per MMBtu. 54,482 MMBtu per day of the year 2000 collar contracts and associated put contracts are extendable for one year at the option of the counterparties at weighted average per MMBtu prices of $2.09-$2.71 for the collar contracts and $1.80 for the put contracts.

** Concurrent with the Company's purchase of the year 2001 collar contracts, the Company sold year 2001 put contracts to the counterparties for an equal volume at a weighted average index price of $1.95 per MMBtu. Consequently, if the weighted average year 2001 index price falls below $1.95 per MMBtu, the Company will receive the weighted average index price for the notional contract volumes, plus approximately $.30 per MMBtu. The year 2001 collar contracts and associated put contracts are extendable for one year at the option of the counterparties for notional contract volumes of 60,000 MMBtu per day at weighted average per MMBtu prices of $2.25-$2.64 for the collar contracts and $1.95 for the put contracts.

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 (excluding hedge results) and reported, and the net effects of settlements of gas price hedges to revenue:

                                                     Year Ended December 31,
                                                    ------------------------
                                                     1999     1998     1997
                                                    ------   ------   ------

Average price reported per Mcf...................   $ 1.90   $ 1.82   $ 2.20
Average price realized per Mcf...................   $ 1.84   $ 1.80   $ 2.41
Addition/(reduction) to revenue (in millions)....   $  9.4   $  3.6   $(21.9)

Mark-to-Market Derivatives

As of December 31, 1999 and 1998, the Company has recognized other current liabilities in the accompanying Consolidated Balance Sheets of $15.9 million and $3.4 million, respectively, associated with non-hedge mark-to-market derivatives. The following descriptions provide information pertaining to non-hedge mark-to-market derivatives that the Company was a party to as of December 31, 1999 and 1998. See Note C. "Disclosures About Fair Value of Financial Instruments" for information regarding the Company's determination of the fair values of derivative financial instruments.

Interest rate cap. At December 31, 1998, the Company was party to an interest rate cap agreement with a counterparty which capped the Canadian dollar banker's acceptance rate at 8.00 percent on a notional amount of $80 million Canadian dollars. The agreement expired in August 1999. Under the agreement, the Company paid the counterparty a fixed amount in Canadian dollars on a quarterly basis.

Foreign currency agreements. The Company has a series of forward foreign exchange swap agreements to exchange Canadian dollars for United States dollars at future dates for a fixed amount of the first currency. As of December 31, 1999 and 1998, the United States dollar equivalent of foreign currency exchange swap agreements approximated $72 million and $144 million, respectively. These contracts originated with the Company's acquisition of Chauvco in December 1997. As these contracts do not qualify as hedges, the Company recorded non-cash mark-to- market adjustments to decrease the associated contract liabilities by $5.9 million during 1999 and to increase the associated liabilities by $14.7 million during 1998. These contracts will continue to be marked-to-market until they mature at various dates in the fourth quarter of 2000. The related effects on the Company's results of operations in future periods could be significant.

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

BTU swap agreements. 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 received a premium of $.52 per MMBtu over market natural gas prices from January 1, 1997 through December 31, 1998. Additionally, the Company receives 10 percent of the NYMEX oil price for the volumes covered for a six-year period ending December 31, 2004. As these derivative contracts do not qualify as hedges, the Company recorded non-cash mark-to-market adjustments to reduce the carrying value of the BTU swap liability by $.2 million during 1999 and, during 1998 and 1997, to increase the BTU swap liability by $5.8 million and $5.2 million, respectively. These contracts will continue to be marked-to-market at the end of each reporting period during their respective lives. The related effects on the Company's results of operations in future periods could be significant.

Other non-hedge commodity derivatives. During 1999, the Company sold call options that provide the counterparties an option to exercise call provisions on 10,000 barrels per day of oil, at a strike price of $20.00 per barrel, for a twenty-one month period that began on April 1, 1999 and ends on December 31, 2000, or to exercise call provisions over that same time period on 100,000 MMBtu per day of natural gas, at a weighted average strike price of $2.75 per MMBtu. These contracts do not qualify for hedge accounting treatment. Other expenses in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended December 31, 1999 includes $21.2 million of non-cash mark-to-market charges associated with these call options.

NOTE I. 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 10 percent or more of the consolidated oil, NGL and gas revenues of the Company during the years ended December 31, 1999, 1998 or 1997:

                                                   Percentage of Consolidated
     Customer                                       Oil, NGL and Gas Revenues
     --------                                      ---------------------------
                                                    1999       1998       1997
                                                   ------     ------     -----
     Williams Energy Services...................      11         10         -
     Genesis Crude Oil, L.P.....................       2         10         23
     Mobil Oil Corporation......................       7          7         16
     Western Gas Resources......................       1          5         10
     Producers Energy Marketing, LLC (a)........      -           3         11
-------------

(a) Producers Energy Marketing, LLC ("ProEnergy") is a natural gas marketing company in which the Company owned a noncontrolling member interest of approximately 10 percent during 1997. Effective January 1, 1998, the Company withdrew as a member of ProEnergy.

At December 31, 1999, the amounts receivable from Williams Energy Services, Genesis Crude Oil, L.P., Mobil Oil Corporation and Western Gas Resources were $15.4 million, $.1 million, $6.0 million and $.1 million, respectively, which are included in the caption "Accounts receivable - trade" in the accompanying Consolidated Balance Sheet.

NOTE J. Other Revenue

During December 1998, the Company announced the sale to a third party of an exclusive and irrevocable option to purchase certain oil and gas properties and other assets of the Company. In consideration for the option, the third

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

party paid a fee of $41.3 million to the Company, consisting of $29.3 million of cash and the third party's common stock that was then valued at $12.0 million. The third party's option lapsed by its terms during the first quarter of 1999. During the second quarter of 1999, the Company entered into a purchase and sale agreement with the third party that was not completed as specified by the terms of the agreement and, as a result thereof, the Company received liquidated damages of additional shares of the third party's common stock valued at $.5 million. During 1999, the Company recognized other revenue of $41. 8 million associated with the transactions described above.

During 1999, the Company received an excise tax refund of $30.2 million. Due to uncertainties surrounding the collectability of this refund, the Company did not recognize it as an asset until it was realized. Accordingly, the Company recognized the tax refund as other revenue during 1999.

NOTE K. Asset Divestitures

During 1999, the Company completed the divestiture of certain assets for net divestment proceeds of $420.5 million (of which $390.5 million were cash proceeds) and recorded an associated net loss on disposition of assets of $24.2 million. The net cash proceeds from the 1999 asset divestitures were used to reduce outstanding indebtedness.

Prize divestiture. On June 29, 1999, the Company completed a sale of certain United States oil and gas producing properties, gas plants and other assets to Prize. The oil and gas producing assets sold to Prize include properties located in the Gulf Coast, Mid Continent and Permian Basin areas of the Company's United States region.

In accordance with the terms of the purchase and sale agreement (the "Prize Divestiture"), the Company received net sales proceeds of $245.0 million, comprised of $215.0 million of cash and 2,307.693 shares of six percent convertible preferred stock having a liquidation preference and fair value of $30.0 million. The convertible preferred stock provides for six percent annual dividend payments, payable quarterly in additional equity shares of Prize through 2001. Subsequent to 2001, Prize has the option of paying the quarterly dividends on the convertible preferred stock in equity shares or cash. Each share of the convertible preferred stock may, at the option of the Company, be converted into one share of Prize common stock, subject to certain anti-dilution adjustments. The Company recognized a loss of $46.4 million from the Prize Divestiture during 1999.

Other United States divestitures. In addition to the Prize Divestiture, the Company completed the divestitures of non-strategic United States oil and gas properties located in the South Texas Gulf Coast, West Texas Permian Basin and North Dakota areas, an East Texas gas facility and certain other assets for net cash proceeds of $116.2 million during 1999. Associated with these divestitures, the Company recorded net gains on divestitures of assets of $31.0 million during 1999.

Canadian divestitures. During 1999, the Company completed the divestitures of certain non-strategic Canadian oil and gas properties, gas plants and other related assets. In accordance with the terms of the Canadian divestitures, the Company received net cash proceeds of $59.3 million, and recognized a net loss of $8.8 million.

NOTE L. Impairment of Long-Lived Assets

Based upon the decline in oil prices that began in the fourth quarter of 1997 and continued through the first quarter of 1999, the Company's outlook for future commodity prices and the Company's assessment of performance issues relative to certain of its oil and gas properties, the Company estimated the expected future cash flows of its oil and gas properties as of December 31, 1998 and 1997, and compared such estimated future cash flows to the respective carrying amounts of the oil and gas properties to determine if the carrying amounts were likely to be recoverable. For those proved 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

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999, 1998 and 1997

amount of those proved 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 non-cash impairment provisions of $312.2 million and $1.4 billion related to its proved oil and gas properties during 1998 and 1997, respectively.

Based on the Company's 1999 and 1998 assessments of its unproved properties, the Company recognized non- cash unproved property impairment provisions of $17.9 million and $147.3 million, respectively, during 1999 and 1998.

See Note O for disclosure of these impairment charges by geographic operating segment.

NOTE M. Reorganization

During 1998, the Company announced its plans to sell certain non-strategic oil and gas fields, its intentions to reorganize its operations by combining its six domestic operating regions, and other cost reduction initiatives intended to allow the Company to realize greater operational and administrative efficiences. Specific cost reduction initiatives included the relocation of most of the Company's administrative services from Midland, Texas to Irving, Texas; the closings of the Company's regional offices in Oklahoma City, Oklahoma, Corpus Christi, Texas and Houston, Texas; the termination of 350 employees, including several officer positions; and, further centralization of the Company's organization structure. The consolidation of administrative services to Irving and the closing of the Corpus Christi, Texas office were completed in 1998. The Company completed the closings of the Houston, Texas and Oklahoma City, Oklahoma offices during 1999 and further centralized certain operational functions in Irving, Texas. The unpaid employee termination costs as of December 31, 1998 related to employees who were notified of their pending termination prior to December 31, 1998, but were still employed with the Company as of December 31, 1998. The unpaid office closing amounts as of December 31, 1999 and 1998, primarily relate to lease commitments on the office buildings in Oklahoma City, Oklahoma, Corpus Christi, Texas, and Houston, Texas. As a result of the reorganization initiatives, the Company has recognized reorganization charges of $8.5 million and $33.2 million during 1999 and 1998, respectively.

The following table provides a description of the components of the reorganization charges and unpaid portions of the charges as of December 31, 1999 and 1998:

                                                               Unpaid
                                       Total                Portion as of
                                      Charges    Payments    December 31,
                                      --------   --------   -------------
                                                (in thousands)
1999:
  Employee terminations...........    $  3,125   $  7,805      $    -
  Relocation......................       4,998      4,768           230
  Office closings.................         340      2,233         1,637
  Other...........................          71         71           -
                                       -------    -------       -------
                                      $  8,534   $ 14,877      $  1,867
                                       =======    =======       =======
1998:
  Employee terminations...........    $ 22,525   $ 17,845      $  4,680
  Relocation......................       6,677      6,677           -
  Office closings.................       3,873        343         3,530
  Other...........................         124        124           -
                                       -------    -------       -------
                                      $ 33,199   $ 24,989      $  8,210
                                       =======    =======       =======

NOTE N. 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"). The Company and its eligible subsidiaries file a consolidated United States federal income tax return. Certain subsidiaries are not eligible to be included in the

PIONEER NATURAL RESOURCES COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

consolidated United States federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities. The tax returns and the amount of taxable income or loss are subject to examination by United States federal, state and foreign taxing authorities. Current and estimated tax payments of $800,000; $300,000 and $2.7 million were made in 1999, 1998 and 1997, respectively. In addition, the Company received income tax refunds of $1.4 million and $3.3 million in 1999 and 1998, respectively. During 1999, 1998 and 1997, the Company's income tax provision (benefit) and amounts separately allocated were as follows:

                                                      Year Ended December 31,
                                                  -------------------------------
                                                    1999       1998       1997
                                                  --------   --------   ---------
                                                          (in thousands)
Income (loss) before extraordinary item.........  $   (600)  $ 15,600   $(500,300)
Extraordinary loss..............................       -          -        (7,200)
Stockholders' equity provision (benefit)........       -        4,300      (2,900)
Change in cumulative translation adjustment.....     1,600     (6,000)        -
                                                   -------    -------     -----
                                                  $  1,000   $ 13,900   $(510,400)
                                                   =======    =======    ========

Income tax provision (benefit) attributable to income (loss) before extraordinary item consists of the following:

                                     Year Ended December 31,
                               ---------------------------------
                                  1999        1998        1997
                               ---------   ---------   ---------
                                         (in thousands)
Current:
  U.S. federal...............  $     -     $  (3,300)  $     900
  State and local............        400         300         100
  Foreign....................     (1,000)        -           -
                                --------    --------    --------
                                    (600)     (3,000)      1,000
                                --------    --------    --------
Deferred:
  U.S. federal...............     14,700     123,500    (470,000)
  State and local............        -          (300)    (28,500)
  Foreign....................    (14,700)   (104,600)     (2,800)
                                --------    --------    --------
                                     -        18,600    (501,300)
                                --------    --------    --------
Total........................  $    (600)  $  15,600   $(500,300)
                                ========    ========    ========

Income (loss) before income taxes and extraordinary item consists of the following:

                                               Year Ended December 31,
                                         -----------------------------------
                                            1999       1998         1997
                                         ---------   ---------   -----------
                                                   (in thousands)
Income (loss) before income taxes
 and extraordinary item:
  U.S. federal........................   $ (23,594)  $(393,602)  $(1,369,582)
  Foreign.............................         534    (337,224)       (7,981)
                                          --------    --------     ---------
                                         $ (23,060)  $(730,826)  $(1,377,563)
                                          ========    ========    ==========

Reconciliations of the United States federal statutory rate to the Company's effective rate for income (loss) before extraordinary item are as follows: