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Pioneer Shows Progress with Permian Well Efficiencies, FT Agreements

Pioneer Natural Resources Co., which is using innovative drilling techniques on vintage and new wells in the Permian Basin, expects to increase volumes from its West Texas holdings by 16% year/year even on lower spending.

The Dallas-based independent’s capital expenditures (capex) for this year are set at $3.1-3.4 billion, 11% lower than 2018 expenditures. However, production overall is forecast to increase by around 15%.

At the midpoint, the capex plan is around 15% below original expectations, improved by drilling efficiencies, upgraded well designs and in-basin sand, which have reduced costs by as much as $1.25 million/well.

Average volumes in 4Q2018 increased to 319,633 boe/d from 304,989, with oil climbing to 199,193 b/d from 179,737. Natural gas volumes fell to an average of 351 MMcf/d versus 377 MMcf/d, while natural gas liquids (NGL) volumes declined to 61,911 b/d from 62,395.

In the Permian, production in 4Q2018 averaged 302,000 boe/d, at the top end of guidance, with oil at 194,000 b/d. For 2018 overall Permian production increased by 26% year/year to 283,000 boe/d, with oil output up 23%.

CEO Tim Dove and the management team shared a microphone on Thursday to discuss quarterly results and the forecast for 2019. What’s boosting the plans are Pioneer’s firm transportation (FT) agreements in the Permian, which helped lift incremental cash flow in the final three months to $173 million. The FT agreements give Pioneer leverage to move oil volumes south and gas volumes west at better prices. Overall incremental cash flow from the FT agreements totaled $458 million in 2018.

“Our firm transportation contracts delivered fantastically in 2018,” Dove said. The cash flow uplift “is a phenomenal benefit coming from the long-term thinking, and the key being our ability to deliver on FT oil volumes to the Gulf Coast and for export” at Brent prices.

Pioneer fetched a realized oil price during the fourth quarter of $49.80/bbl, while it received an NGL price of $26.88 and a realized gas price of $1.75/Mcf. Adjusting for the cash flow uplift from the FT contracts, the average realized oil price increased by $9.36/bbl to $59.16, excluding the effects of derivatives.

Plans this year are to run 21-23 horizontal rigs and complete 265-290 gross lateral wells, “slightly higher” activity than in 2018, even with the capex cuts. Pioneer is basing its activity on an average oil price of $53/bbl West Texas Intermediate and $60 Brent, which would lead to about $3.2 billion in cash flow, “easily enough” to pay for the activity, Dove said.

The Permian well mix “still is skewed pretty heavily toward Wolfcamp A and B, Spraberry and some additional tests in the Wolfcamp D,” he told investors during the call.

He repeated the operator’s “improving capital efficiency,” led in part to a big shakeup in the once widespread portfolio. Pioneer also has gained less costly in-basin sand supply in West Texas, a project set to be completed before mid-year.

“At that point in time we can show very significant cost benefits,” Dove said. “It's really important to point out that these are not sort of pie-in-the sky or wish-list cost benefits. These are all based on contractual arrangements...So these are readily achievable…”

For example, pressure pumping cost savings could be as much as $650,000/well once the sand supply is nearer the source for drilling. Redesigned wells also reduce the costs by another $200,000.

“For 2019, the substantial cost savings related to the strategic divestiture of our pressure pumping assets and transition to West Texas sand will significantly decrease our cost structure and improve capital efficiencies,” Dove said. “These actions drive an 11% decrease in drilling, completions and facilities capital, while delivering a robust 12-17% increase in production when compared to 2018.”

Management sees the potential for some inflation this year, likely in the second half, as more Permian takeaway comes online, which would lead producers to increase activity and thus squeeze oilfield services. Pioneer has baked in a 2% inflation rate for the year.

During the question-and-answer period, one analyst questioned whether Pioneer was using the “right model” for business, given that higher production, lower spending, flat net debt and higher oil prices have failed to move the share price, which remains fixed at about what it was in March 2016. The analyst asked whether Pioneer instead should buy back shares more aggressively, given that the market appears to pay for growth/debt adjusted versus absolute growth.

The CEO noted that versus the previous two years, Pioneer’s overall activity has declined, while output has risen percentage-wise.

“We have a range now which centers on 15%,” Dove said of production growth. “Obviously, we can ratchet within that range at a moment's notice just based on how much activity we want to execute on. But fundamentally, we've taken significant steps to increase...return of capital to shareholders.”

The company increased its semiannual cash dividend in February 2018 by 300% to 16 cents/share, and on Thursday it doubled it to 32 cents, or 64 cents on an annualized basis. In December the board also authorized a share buyback program of $2 billion.

“Obviously we're going to manage the company to low leverage like we've done in the past, given the volatile industry we live in,” Dove said. “But we have clearly a great balance sheet today that allows us to take advantage of the valuation of our stock when we think it's appropriate to buy back aggressively if need be…

“If you look at what is the ultimate model, it's to actually generate excess cash such that we could actually decide regarding dividend increases or share repurchases from that incremental cash above our capital needs. We're on a trek to that exact outcome.”

Net income in 4Q2018 was $324 million ($1.89/share), down by more than half from a year ago when it earned $665 million ($3.87). Mark-to-market derivatives gains recorded during 4Q2018, excluding one-time items, put adjusted net profits at $202 million ($1.18).

Net income for 2018 was $978 million ($5.70/share), versus 2017 earnings of $833 million ($4.85).

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