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Pioneer Grows in Midland Basin as Devon Sells

Pioneer Natural Resources Co. (PXD) is expanding its acreage position in the Midland Basin in a $435 million deal with Devon Energy Corp. It is one of two asset sales announced Wednesday by Oklahoma City-based Devon, which has been jettisoning acreage and righting its balance sheet. Both companies are planning to ramp up activity.

Devon is selling its remaining noncore assets in the Midland Basin, a sub-basin of the Permian, in two deals worth a combined $858 million. The buyer in the other transaction was not disclosed.

Irving, TX-based Pioneer will acquire 28,000 net acres in the Midland Basin in Martin, Midland, Upton, Reagan, Glasscock, Andrews, Dawson, Gaines and Howard counties. Net production is about 1,000 boe/d, with oil comprising about 70%. Substantially all of the acreage is held by production.

"Assuming $40,000 per flowing boe/d and the reported 1,000 boe/d, PXD paid approximately $14,100/acre, adding about 150 Wolfcamp B locations..." Wells Fargo Securities LLC analysts said. "Pioneer has made important strides in accelerating its growth plans. As the horizontal Wolfcamp matures, we see [the] company's vast resource potential driving shares." Wells Fargo has an "outperform" rating on Pioneer.

Substantially all of the 28,000 net acres is in the core of the Midland, with significant portions offsetting existing Pioneer acreage, the company said. Of the core acreage being acquired, about 15,000 net acres are in the Sale Ranch area in Martin County and northern Midland County where Pioneer has drilled its most productive Wolfcamp B wells. The majority of the Wolfcamp B acreage that Pioneer is acquiring in the Sale Ranch area sits directly below the company's Wolfcamp A acreage, it said.

The acquisition, combined with Pioneer's existing footprint, will add about 70 Wolfcamp B locations to its Sale Ranch area drilling inventory. These locations have an average lateral length of 9,000 feet. The company expects before-tax internal rates of return on these wells to exceed 50% and a before-tax net present value per well of about $10 million assuming current strip prices, an $8 million drill and complete cost, production performance that is expected to be similar to existing Sale Ranch horizontals that have comparable lateral lengths and a 10% discount rate. The leases associated with these additional locations account for about 7,000 net acres (of the 15,000 net acres acquired in this area), and Pioneer will have an average working interest of 95% in these wells.

The remaining 8,000 net acres in the Sale Ranch area and northern Midland County include about 80 Wolfcamp B locations where wells with laterals of less than 7,500 feet can be drilled. Pioneer will have an average working interest of 68% in these locations. The company said it plans to acquire or trade for additional acreage adjacent to these leases in order to increase its working interests and extend well lateral lengths to greater than 7,500 feet.

Pioneer has placed 41 horizontal Wolfcamp B interval wells on production in the Sale Ranch area since mid-2014 with lateral lengths of 7,000 feet or greater. Sixteen wells had an average lateral length of 7,000 feet, an average initial 30-day production rate of 1,375 boe/d and an average oil content of 78%. Twenty-three wells had an average lateral length of 9,500 feet, an average initial 30-day production rate of 1,760 boe/d and an average oil content of 79%. The remaining two wells, which have been on production for about 60 days, were Pioneer's two longest lateral length wells to date in the Spraberry/Wolfcamp with an average lateral length of 12,000 feet. Both wells benefited from completion optimization and delivered an average initial 30-day production rate of 2,180 boe/d and an average oil content of 77%.

Production from each of Pioneer's Sale Ranch wells is exceeding a 1 million boe estimated ultimate recovery (EUR) type curve -- the 7,000-foot average lateral length wells by 10%, the 9,500-foot average lateral length wells by 55% and the 12,000-foot average lateral length wells by 90%. "The performance of the Sale Ranch wells demonstrates the benefits of being able to drill longer lateral length wells, especially when combined with Pioneer's successful completion optimization program," the company said (see Shale DailyApril 26).

Pioneer said it plans to use the remaining 13,000 net acres being acquired, along with existing acreage, in trades that will further consolidate its acreage in the Midland core, enabling the drilling of longer laterals. Pioneer said it has traded or acquired about 19,000 gross acres since early 2015, which has added 3.2 million feet of gross lateral length to the Spraberry/Wolfcamp horizontal drilling program.

The horizontal rig count in the northern Spraberry/Wolfcamp will likely be raised from 12 rigs to 17, with the first additional unit to be added in September, followed by two more in October and November, Pioneer said, noting its "improving outlook for oil prices."

Pioneer said it expects to utilize three rigs to drill the locations being added in the Sale Ranch area once the well locations are permitted. The 2016 capital budget is expected to increase by about $100 million from $2.0 billion to $2.1 billion as a result of the rig additions.

The addition of five rigs is expected to have a "minimal" impact on the forecasted 2016 production growth rate of 12%-plus due to multi-well pad drilling. Based on running 17 rigs during 2017, Pioneer said it expects to deliver a production growth rate ranging from 13 to 17%, with Spraberry/Wolfcamp area production growth ranging from 28 to 32%.

"PXD is ramping up in a big way..." Wunderlich Securities Inc. analysts said, adding that the projected 2017 growth exceeds their estimate of 10%. "We reiterate our 'buy' rating on PXD."

On Wednesday Pioneer priced an underwritten public offering of 5.25million common shares for gross proceeds of $827 million with a portion to be used to fund the Midland Basin acquisition.

Last February, Pioneer CEO Scott Sheffield and Devon CEO David Hager shared a dais at IHS CERAWeek in Houston. "U.S. shale needs $60-70 to really grow production," Sheffield said at the time. "If the world needs U.S. shale to grow, it needs $60-70. It's not going to work at $45-50. Plays do work like Dave [Hager] said at $45-50, but we just don't have the cash flow and the margins to be able to drill enough wells to grow the business [see Shale DailyFeb. 29]." At the time, the CEOs also expressed a preference for oil over natural gas.

Like Pioneer, on Wednesday in its deal announcement Devon also said it would be ramping up activity.

"With the success of our E&P asset sales, we are now in the planning stages to increase our upstream activity by approximately $200 million in the second half of this year," Hager said. "This additional activity will deliver production in early 2017 and beyond. Additionally, we are seeing even better than expected results from our core business and we are raising the midpoint of our full-year 2016 production guidance by 7,000 boe/d."

Devon said its 2016 upstream capital program will now be $1.1 billion to $1.3 billion, an increase of $200 million from previous guidance. Incremental capital is to be deployed in the Delaware Basin and in the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties (STACK) beginning during the third quarter with the addition of three operated rigs. Devon said it is evaluating further accelerating activity in the fourth quarter of 2016.

The company also raised its full-year 2016 production guidance from core assets to a range of 540,000 to 560,000 boe/d, representing an increase of 7,000 boe/d.

The other transaction announced Wednesday by Devon is the sale of its assets in the southern Midland Basin for $423 million to an undisclosed buyer. Current production from these assets is about 22,000 boe/d, of which 33% was oil. At Dec. 31, 2015, proved reserves associated with the properties totaled 43 million boe. Field-level cash flow accompanying these assets, which excludes overhead costs, amounted to $13 million in the first quarter of 2016.

These latest deals bring Devon's announced noncore sales tally to $2.1 billion. Earlier this month the company announced the sale of nearly $1 billion of natural gas-weighted upstream assets in East Texas, the Midland Basin and in the Anadarko Basin's Granite Wash formation, which together produce about 37,000 boe/d (see Shale DailyJune 6Feb. 17).

"We anticipate our total noncore asset sales to be at or above the top end of our $2 billion to $3 billion guidance, with the sale of our 50% interest in the Access pipeline," Hager said Wednesday.

Two-thirds of proceeds or more will be used to strengthen the balance sheet, Hager said. About one-third is to be reinvested in U.S. resource plays.

Wells Fargo analysts said in a note that the sales were not unexpected and are "positive," particularly in light of a "tough" first half acquisitions and divestitures market. Wells Fargo has an "outperform" rating on Devon, as does BMO Capital Markets Corp.

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