Pioneer Natural Resources Co. kept perfecting its Spraberry/Wolfcamp game during the third quarter, further stretching its completion and optimization program and growing production.
Dallas-based Pioneer is the largest acreage holder in the Spraberry/Wolfcamp, with 600,000 gross acres in the northern portion of the play and 200,000 gross acres in its southern Wolfcamp joint venture area. The company touts decades ahead of horizontal wells with laterals ranging from 7,500 feet to 14,000 feet.
"Our strong financial position and improving capital efficiency are allowing us to continue to drill high-return wells, grow production and bring forward the inherent net asset value associated with this world class asset during a period of relatively low commodity prices," CEO Scott Sheffield, who is retiring at year-end (see Shale Daily, May 19), said of the company's performance in the Spraberry/Wolfcamp. "We are on a trajectory to deliver compound annual production and cash flow growth through 2020 of approximately 15% and 25%, respectively, while maintaining a net debt-to-operating cash flow ratio below 1.0 times assuming late-October strip prices. We also expect to spend within cash flow in 2018, assuming an oil price of approximately $55/bbl."
During an earnings conference call, COO Timothy Dove was asked about the acquisition and divestiture market in the Permian Basin. He said the company is "extremely pleased" with its recent Midland Basin acquisition from Devon Energy Corp. (see Shale Daily, June 16).
"We do believe those types of transactions will be few and far between," he said. "It's hard to find inventory out there that's as good a what we own and inventory that will have the effect of high-grading our own inventory. That said, we think when we do a transaction like the Devon transaction, we should also carve some assets off the bottom of our portfolio. And toward that end, we have three individual efforts under way, one of which is in full gait right now. This is the sale of acreage in Andrews County. It's about 7,000 net acres." A 20,000-acre package in northeast Martin County could also be on the block, as well as another smaller package, Dove said.
During the third quarter, Pioneer placed 46 horizontal wells on production in the Spraberry/Wolfcamp. Forty of these were in the northern portion of the play (19 Wolfcamp B, 10 Wolfcamp A, 10 Lower Spraberry Shale and one Jo Mill Shale) and six wells were in the southern Wolfcamp joint venture area (all Wolfcamp B wells). Twenty-eight wells benefited from Pioneer's "Version 3.0" completion optimization program, the company said.
Early this year Pioneer began to test Version 3.0. Seventy wells were placed on production during the first nine months of the year, of which 52 were in the Wolfcamp B (29 wells in the northern area and 23 wells in the southern Wolfcamp joint venture area) and 18 wells were in the Wolfcamp A (all in the northern area). Early production rates from these 70 wells are exceeding Version 2.0 wells after the chokes on the wells were fully opened, the company said. Choke management is being utilized on these wells and most Version 2.0 wells to optimize the use of existing water disposal infrastructure. The remaining 30 wells in the Version 3.0 test program are expected to be placed on production during the fourth quarter.
"Production data from IHS Performance Evaluator (a third-party source) continues to show that Pioneer is consistently drilling the most productive horizontal wells in the Midland Basin," the company said. For the period from September 2015 through June 2016, Pioneer's three-month cumulative oil production averaged approximately 55,000 bbl per well from the approximately 150 wells reported for Pioneer. For the same period, the average three-month cumulative oil production for 14 peers operating in the Midland Basin ranged from approximately 25,000 bbl per well to 50,000 bbl per well.
Pioneer said it continues to expect to place about 230 horizontal wells on production in the Spraberry/Wolfcamp area during 2016. Of these wells, approximately 190 wells will be in the northern area and 40 wells will be in the southern Wolfcamp joint venture area. Approximately 60% of the wells will be drilled in the Wolfcamp B, 25% in the Wolfcamp A and 15% in the Lower Spraberry Shale. The current cost to drill and complete a horizontal well has been reduced to about $7.0 million on average for all intervals, reflecting average perforated lateral lengths of approximately 9,000 feet and utilization of a combination of Version 3.0 and Version 2.0 optimized completion designs.
Production costs for Pioneer's horizontal Spraberry/Wolfcamp wells are averaging $4.00/boe per well (including lease operating expenses of approximately $2.00/boe and production and ad valorem taxes of approximately $2.00/boe).
The drilling program in the northern Spraberry/Wolfcamp area is expected to continue to deliver internal rates of return ranging from 50% to 65%, assuming late-October strip commodity prices and a combination of Version 2.0 and Version 3.0 completions. These returns, which include tank battery and saltwater disposal facility costs, are benefiting from ongoing cost reduction efforts, drilling and completion efficiency gains and well productivity improvements.
The horizontal drilling program continues to drive production growth, with total Spraberry/Wolfcamp production growing by 12,000 boe/d, or 7%, in the third quarter of 2016 compared to the second quarter of 2016. Oil production grew 3% in the third quarter and represented 67% of third quarter Spraberry/Wolfcamp production on a boe basis. Horizontal production grew to 72% of total Spraberry/Wolfcamp production, with vertical production declining to 28%.
Pioneer raised its forecasted 2016 growth rate for the Spraberry/Wolfcamp from 34%-plus to 36%-plus as a result of improving well productivity. Oil production growth is also expected to increase from 34%-plus to 38%-plus this year. The company said it assumes that it will continue to reject approximately 5,000 boe/d of ethane over the remainder of 2016 based on weak market conditions.
For the fourth quarter of 2016, Pioneer expects to place approximately 60 horizontal wells on production, up from the 46 wells placed on production in the third quarter. The timing of these wells is expected to be weighted toward the second half of the quarter. The company also expects to continue to place wells on production utilizing choke management in order to optimize the use of water disposal infrastructure.
Pioneer's production in the West Panhandle field was 7,000 boe/d in the third quarter, approximately 2,000 boe/d below the expected level, because of unplanned downtime at Pioneer's Fain gas processing plant. Repairs to the facility are ongoing, with the expectation that the plant will be brought back to its full production rate of approximately 9,000 boe/d later in the fourth quarter.
The company has maintained its capital budget for 2016 at $2.1 billion, which includes $1.95 billion for drilling and completions-related activities, including tank batteries/saltwater disposal facilities and gas processing facilities, and $150 million for vertical integration, systems upgrades and field facilities.
The Northern Spraberry/Wolfcamp is to get $1.81 billion, which includes $1.54 billion for the horizontal drilling program, $160 million for tank batteries/saltwater disposal facilities, $45 million for gas processing facilities and $65 million for land, science and other. The Southern Wolfcamp joint venture area (net of carry) is to get $60 million, which includes $45 million for the horizontal drilling program, $10 million for tank batteries/saltwater disposal facilities and $5 million for land and other. The Eagle Ford Shale is to get $60 million, which includes $30 million for the horizontal drilling program and $30 million for compression, land and other. Other assets are to get $20 million.
Capital spending is expected to be funded from forecasted operating cash flow of $1.5 billion and cash on hand (including investments). Pioneer had a net debt-to-forecasted 2016 operating cash flow at the end of the third quarter of 0.2 times, and net debt-to-book capitalization was 3%.
The company now expects to deliver production growth of 14% or more in 2016 compared to 2015. This growth reflects Spraberry/Wolfcamp area production growing by 36%-plus, partially offset by declines of about 25% in the Eagle Ford Shale and 10% across Pioneer's other assets.
During the fourth quarter, production is forecasted to average 237,000 boe/d to 242,000 boe/d.
The average realized price for oil during the third quarter was $41.44/bbl. The average realized price for natural gas liquids was $12.46/bbl, and the average realized price for gas was $2.43/Mcf. These prices exclude the effects of derivatives.
Pioneer reported third quarter net income of $22 million (13 cents/share). Noncash mark-to-market derivative losses were offset by an income tax benefit attributable to tax credits for research and experimental expenditures related to horizontal drilling and completions innovations, resulting in adjusted income also being $22 million after tax (13 cents/share) for the third quarter. Year-ago net income was $646 million ($4.28/share).