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Pioneer Doesn't Need Too-High Prices, CEO Sheffield Says

With oil prices having crept up some, is it possible they could get too high? They can if you're Scott Sheffield, CEO of Pioneer Natural Resources Co. Too-high prices would drive up costs, and Pioneer can do just fine at $50-55/bbl with its Permian Basin acreage, Sheffield said Thursday.

During a second quarter earnings conference call, Sheffield was asked what the company's activity would look like if oil prices were "substantially higher" than $55/bbl.

"It's amazing to me that we can achieve 15% production growth to 2020 in a $52-53/bbl oil price environment," Sheffield said. "Obviously, in a $60, $70, $80 price environment, the company will have to bring forward more of the locations, and the growth rate is going to be that much higher. But what you've got to factor in, though, is what's going to happen to the service costs. We saw what happened in 2014.

"That's why I personally look at the model and would rather oil stay in the $50-55 range and keep costs in check, as a large shareholder." Sheffield said in May that he would retire as CEO at the end of this year (see Shale DailyMay 19).

"The performance from our Spraberry/Wolfcamp horizontal drilling program continues to be outstanding," Sheffield said. "We are on a trajectory to deliver compound annual production growth of approximately 15% while maintaining a net debt-to-operating cash flow ratio below 1.0 times through 2020 at mid-July strip prices. We also expect to spend within cash flow in 2018 assuming an oil price of approximately $55 per barrel."

Pioneer is the largest acreage holder in the Permian's Spraberry/Wolfcamp, with about 600,000 gross acres in the northern portion of the play and about 200,000 gross acres in its southern Wolfcamp joint venture area. Pioneer's contiguous acreage position and substantial resource potential allow for "decades of drilling horizontal wells" with laterals ranging from 7,500 to 13,000 feet.

The company placed 69 horizontal wells on production in the Spraberry/Wolfcamp during the second quarter, nine wells above forecast. Of the 69 wells, 49 were in the northern portion of the play (33 Wolfcamp B, seven Wolfcamp A, eight Lower Spraberry Shale and one Jo Mill Shale); and 20 wells were in the southern Wolfcamp joint venture area (20 Wolfcamp B). Thirty-seven wells benefited from Pioneer's "Version 3.0" completion optimization program, the company said.

This program combines longer laterals with optimized stage length, clusters per stage, fluid volumes and proppant concentrations. "The objective of the program is to improve well productivity by allowing more rock to be contacted closer to the wellbore," Pioneer said. "In 2013 and 2014, Pioneer's initial fracture stimulation design (Version 1.0) consisted of proppant concentrations of 1,000 pounds per foot, fluid concentrations of 30 barrels per foot, cluster spacing of 60 feet and stage spacing of 240 feet.

Beginning in mid-2015, the company enhanced its fracture stimulation design (Version 2.0), which consisted of larger proppant concentrations of 1,400 pounds per foot, larger fluid concentrations of 36 barrels per foot, tighter cluster spacing of 30 feet and shorter stage spacing of 150 feet. The Version 2.0 design increased the cost of a completion by about $500,000 per well.

Beginning in the second quarter, Pioneer started testing further enhanced completion designs (Version 3.0), which includes larger proppant concentrations up to 1,700 pounds per foot, larger fluid concentrations up to 50 barrels per foot, tighter cluster spacing down to 15 feet and shorter stage spacing down to 100 feet. The cost of this design adds $500,000 to $1 million per well compared to Version 2.0. The initial Version 3.0 program is expected to test about 80 wells during 2016. The 37 Version 3.0 wells placed on production in the second quarter were the first to test the newest completion technique.

Of the 37 wells, 32 wells are in the Wolfcamp B (14 wells in the northern area and 18 wells in the southern Wolfcamp joint venture area) and five wells are in the Wolfcamp A (all in the northern area). Early production rates from these 37 wells are exceeding Version 2.0 wells after the chokes on the wells are fully opened. Choke management is being utilized on these wells and most Version 2.0 wells to minimize the capital spent on water disposal infrastructure, Pioneer said. The remaining 43 wells in the Version 3.0 test program are expected to be placed on production during the second half of 2016.

The horizontal drilling program continues to drive production growth, with total Spraberry/Wolfcamp area production growing by 18,000 boe/d, or 12%, in the second quarter compared to the first quarter of 2016. Oil production grew 15% in the second quarter and represented 70% of second quarter Spraberry/Wolfcamp production on a boe basis. Horizontal production grew to 69% of total Spraberry/Wolfcamp production, with vertical production declining to 31%. Second quarter production benefited from the completion optimization program and the timing of wells placed on production due to efficiency gains. The company continued to reject ethane during the second quarter due to weak market conditions, which negatively impacted production by about 5,000 boe/d.

Pioneer is increasing its forecasted 2016 growth rate for the Spraberry/Wolfcamp from 33%+ to 34%+ as a result of improving well productivity. Oil production growth is also expected to increase from 33%+ to 34%+ this year. The company assumes that it will continue to reject about 5,000 boe/d of ethane over the remainder of this year due to a weak market.

For the third quarter, Pioneer expects to place about 50 horizontal wells on production, down from the 69 wells placed on production in the second quarter. It also expects to place more wells on production utilizing choke management in order to minimize the capital spent on water disposal infrastructure. Additionally, the company said it expects shut-in volumes associated with offset fracture stimulations to be 35% greater in the third quarter than the second quarter.

The capital budget for 2016 was increased from $2.0 billion to $2.1 billion during the second quarter (excluding acquisitions, asset retirement obligations, capitalized interest and geological and geophysical G&A) to reflect the cost of adding five rigs in the northern Spraberry/Wolfcamp during the second half of the year.

The company now expects to deliver production growth of 13%+ in 2016 compared to 2015. This growth reflects Spraberry/Wolfcamp area production growing by 34%+, partially offset by declines of about 25% in the Eagle Ford Shale and 10% across Pioneer's other assets. Third quarter production is forecasted to average 232,000-237,000 boe/d.

Pioneer reported a net loss of $268 million (minus $1.63/share). Without the effect of noncash mark-to-market derivative losses, adjusted results were a net loss of $37 million after tax (minus 22 cents/share). In the year-ago quarter the company reported a net loss of $218 million (minus $1.46/share).

Stay up to date on 2Q16 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.

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