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Pioneer Beats 4Q Guidance on Permian Performance, Issues Equity

Dallas-based Pioneer Natural Resources Co. (PXD) raised its fourth quarter and full-year 2015 production guidance, crediting strong performance from the Permian Basin Spraberry/Wolfcamp program, which this year is expected to contribute largely to 10-15% production growth. It also priced the first shale equity offering of 2016.

"The performance from our Spraberry/Wolfcamp horizontal drilling program continues to be outstanding," said CEO Scott Sheffield. "Our strong balance sheet, strong derivatives position and improving capital efficiency are allowing us to continue to bring forward the inherent net asset value associated with this world-class asset during a period of low commodity prices."

Fourth quarter production is expected to come in at 213,000-215,000 boe/d, which is above the top end of previous guidance of 206,000-211,000 boe/d.

During the fourth quarter, Pioneer placed 44 Spraberry/Wolfcamp horizontal wells on production, as expected, including 35 wells in the company's northern acreage and nine wells in its southern Wolfcamp joint venture area. The completion optimization program was expanded at the end of the third quarter to include an additional 50 horizontal wells as a result of the strong production exhibited by an initial 26-well completion optimization program, Pioneer said.

Almost all of the Spraberry/Wolfcamp wells completed during the fourth quarter benefited from the continuing completion optimization program.

Of the 35 wells placed on production in the northern acreage, 22 wells targeted the Wolfcamp B interval and are on average tracking 30-40% above a type curve that represents estimated ultimate recoveries (EUR) of 1 million boe. Eleven Lower Spraberry Shale wells were also placed on production during the quarter. Early production results from these 11 Lower Spraberry Shale wells are on average tracking EURs between 800,000 boe to 1 million boe over the life of the well.

An additional two Wolfcamp A interval wells were recently placed on production. In the southern Wolfcamp joint venture (JV) area, Pioneer placed nine horizontal wells on production during the fourth quarter. Early production from the Wolfcamp B (eight wells) interval wells and Wolfcamp A (one well) interval well are on average tracking a 1 million boe EUR type curve, Pioneer said.

Because of the Spraberry/Wolfcamp, Pioneer said it expects full-year 2015 production growth of 12% compared with 2014; previous guidance was for 11%. The 2015 capital budget is still on track with the previously forecast $2.2 billion. The 2015 drillbit finding and development cost, and reserve replacement percentage (excluding negative price revisions) will be $10-14/boe and more than 200%, respectively, the company said.

"The company plans to continue to prudently and economically execute the active development of the Spraberry/Wolfcamp through 2017 in the event a 'lower-for-longer' commodity price scenario unfolds," Sheffield said. "Conversely, Pioneer has the financial flexibility to increase the pace of development sooner if the commodity price environment improves."

Pioneer said it plans to keep running 18 horizontal rigs in the Spraberry/Wolfcamp (14 in the Northern Spraberry/Wolfcamp and four in the Southern Wolfcamp JV area) during 2016.

"Due to capital efficiency improvements, including increasing well productivity and a decrease of approximately 25% in drilling and completion capital costs compared to 2014...wells averaging EURs in excess of 1.3 million boe with estimated costs of $8 million generate internal rate of returns in excess of 30% using current oil and gas commodity strip prices," Pioneer said.

Horizontal rigs are being cut in the Eagle Ford Shale, however, from six units to four this month, and could be cut further during the year.

The company's preliminary 2016 production growth forecast is 10-15% compared with 2015. Compound annual production growth is still projected to be more than 15% (with oil growth of 20%-plus) between 2016 and 2018, assuming the addition of two to three rigs per year during 2017 and 2018.

The preliminary 2016 capital program is expected to be $2.4-2.6 billion. The program is expected to be funded from forecasted operating cash flow, cash on the balance sheet at year-end 2015 (excluding the proceeds from the December bond offering that would be used to repay/repurchase the bonds maturing in 2016 and 2017) and $500 million in proceeds to be received July 1 as a result of completing the sale of the Eagle Ford midstream business in 2015 (see Shale DailyJune 1, 2015).

Current derivatives coverage for forecasted oil production is 85% and 20% for 2016 and 2017, respectively. Coverage for forecasted natural gas production is 70% for 2016.

Pioneer on Tuesday priced a public offering of common stock at $117/share and increased the size from 10.5 million to 12 million shares. Gross proceeds are expected to be $1.4 billion. A portion of net proceeds would go toward developing the Spraberry/Wolfcamp, the company said. The move makes Pioneer the first shale producer to raise equity in the new year.

Topeka Capital Markets analyst Gabriele Sorbara noted the strengthening of the company's balance sheet with the equity offering and said activities are now prefunded through most of next year. However, Wells Fargo Securities' analyst Gordon Douthat said funding growth with equity "...does not send a positive signal that a [commodity] price recovery is on the horizon and likely keeps generalists on the sidelines. Commodity prices are telling producers to slow down, but perhaps equity markets are giving a different signal -- at least for companies with good assets/solid balance sheets, shut as PXD."

Don't expect another first quarter equity wave like last year, analysts at Tudor, Pickering, Holt & Co. said in a note Wednesday. "...[T]his appears to be more of a case of 'doing it when you can, not when you have to' to address 2017 and beyond outspend," they said. "Many of the companies who could play this game a year ago are either on the sidelines or virtually gone."

Pioneer shares closed down more than 7% at $116.15 in heavy trading on Wednesday.

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