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Return-Hungry Pioneer Drives Permian Production Higher

Why grow production when commodity prices are in the tank? It's the margin that's important, not the price. Dallas-based Pioneer Natural Resources Co. turned in a strong quarter of production growth, commodity prices be damned, thanks to efficient operations in the Permian Basin.

"Despite the weak commodity price environment, the company reported a great quarter that was highlighted by the impressive production growth delivered by our horizontal drilling program in the [Permian's] Spraberry/Wolfcamp," said CEO Scott Sheffield. "This drilling program continues to provide strong returns due to our aggressive pursuit of cost reductions and efficiency gains, combined with increasing the EURs [estimated ultimate recoveries] of our oil wells.

"We are putting rigs back to work and expect to be able to deliver 15%-plus compound annual production growth over the 2016 through 2018 period using fewer rigs than previously anticipated as a result of improving capital efficiency and well productivity."

Pioneer reported third quarter net income of $646 million ($4.27/share) compared with $374 million ($2.58) in the year-ago quarter. Excluding noncash derivative mark-to-market gains and other unusual items, adjusted results were a net loss of $1 million after tax (minus 1 cent/share).

During a conference call with analysts following the company, Sheffield said management's No. 1 priority is returns, followed by bringing net asset value forward. When the company has a 100-year drilling inventory, he said, it's important to be bringing wells online. Plans for next year aren't likely to change, at least for now. Pioneer management does not believe that oil prices are going to be a flat $45/bbl for the next three years. If that were the case, growth would not be targeted at 15%, executives said.

Pioneer beat the high end of its production guidance, thanks to the Permian. Going forward, the company plans to do more with fewer rigs.

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 said it has more than than 10 billion boe of net recoverable resource potential from horizontal drilling across its entire acreage position. The contiguous acreage position allows for decades of drilling horizontal wells with lateral lengths ranging from 7,500 to 10,000 feet, resulting in improved capital efficiency.

"For example, horizontal wells drilled in the Wolfcamp B interval with lateral lengths of 10,000 feet generate net present values of approximately $8 million compared to wells with shorter lateral lengths of 5,000 feet, which generate net present values of approximately $2.3 million (assuming an oil price of $60/bbl and a gas price of $3.25/Mcf less applicable differentials)," Pioneer management said. "The longer lateral length wells pay out in approximately 18 months, which is twice as fast as the shorter lateral length wells."

Total Spraberry/Wolfcamp production grew 15,000 boe/d in the third quarter to 134,000 boe/d, or 13%, compared to the second quarter of 2015. Oil production in the third quarter grew 10,000 b/d compared to the second quarter and represented 65% of total third quarter production in the asset. Gas and natural gas liquids production increased 5,000 boe/d from the second quarter, benefiting from improved recovery of field gas as a result of gathering system upgrades.

In the liquids-rich area of the Eagle Ford Shale play in South Texas, Pioneer's horizontal rig count was reduced from nine rigs in 2014 to six rigs in early 2015. Drilling activity is focused in Karnes and DeWitt counties. The company placed 36 wells on production in the Eagle Ford during the third quarter, of which 21 wells were in upper part of the play and 15 wells were in the lower part of the play.

Third quarter production from the Eagle Ford averaged 43,000 boe/d, of which 40% was condensate. Production was negatively impacted by well performance issues resulting from well completion design changes (primarily reduced fluid level concentrations) that were made early this year to reduce costs. Future completions will use higher fluid level concentrations in an effort to return well performance to historical levels. The company plans to also test higher proppant concentrations, shorter stage lengths and tighter cluster spacing.

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