Dallas-based independent Pioneer Natural Resources Co.’s firm transportation (FT) contracts in the Permian Basin paid dividends in the first quarter, with oil yielding Brent-related pricing, leading to an incremental $151 million of cash flow.
The Permian pure-play in its quarterly update is continuing to enhance margins through its FT contracts by transporting oil and natural gas to “price-advantaged markets” and expects the activities to provide a cash flow uplift of $50-110 million during the second quarter.
The name of the game is to reduce costs and improve shareholder returns, particularly in the Permian, where operations now are focused, CEO Scott Sheffield said Tuesday during a quarterly conference call.
Pioneer’s founding CEO initially served from 1997-2016 and then took the helm again earlier this year from Timothy L. Dove.
“There is something that definitely has not changed in the two-and-a-half years since I've been gone and that is the company has great people and great assets,” Sheffield said during a Tuesday morning conference call. “The company is achieving free cash flow now as we speak...and that is a primary focus of the company over the next several years.”
The capital budget is on track, and for the first time in more than two years, Pioneer “underspent capital for the first quarter,” he said. “We're 100% committed to spend within budget, between $2.8 billion and $3.1 billion, and the capital obviously will trend down the rest of the year before we go into 2020.”
Primarily on gains on the completions side, Pioneer already has achieved “a little over $300 million in savings,” with another $400 million expected to be achieved by 2020.
After his “listening tour” with employees, “the first thing we did is ask 30% of the officers to retire. We promoted persons to the managing committee in their early 40s to bring up younger talent into the management committee, and now we're over 35% female on the management committee, which is something I'm proud of.”
Pioneer is becoming a “very simple structure,” by flattening the organization with fewer managers and making it more functional. The company now is more “capital focused,” which is “just as important as delivering on the production side of the business.”
Each person will be held accountable, and executives overseeing each team also will be held accountable to help drive down drilling/completion, facilities and G&A costs. Reducing capital costs would enable Pioneer to persevere through every downcycle.
Asked whether Pioneer might be interested in buying more Permian assets, Sheffield said reducing costs were most important today. He did not think the tug-of-war for Anadarko Petroleum Corp. between Chevron Corp. and Occidental Petroleum Corp. (Oxy) signaled more merger and acquisition (M&A) activity was at hand in the near term.
Longer term, however, Oxy, which is keen to add Anadarko’s Permian assets at a hefty premium, could be the start of consolidation in the Permian.
“I personally don’t think we’ll see a lot of M&A over the next two years,” he said, but “in the next five years, majors are going to start running out of inventory,” and they will need to add to their asset base. “Things may happen, but I don’t think there will be a wave of consolidation…
“Smaller Permian operators have to consolidate” and refocus less on output and more on costs to survive. “That’s what the focus should be on…”
Pioneer underspent its budgeted capital in the first three months, CFO Richard Dealey told investors, in part on a “significant uplift” from FT to move oil to the Gulf Coast once again, and where we're going to get Brent-related pricing.”
Pioneer’s oil price margin increased by more than $8/bbl during the quarter, which added $150 million of incremental cash flow.
“During the first quarter we moved about 90% of our oil or roughly 200,000 b/d to the Gulf Coast,” Dealey said. About 75% of the oil was exported, with roughly 60% sent to Asia and 40% to Europe.
During the second quarter, Pioneer expects to be moving about 205,000 b/d, and based on the forecast differentials between Midland and Brent pricing, “we are forecasting a second quarter uplift from firm transportation of $50-110 million,” the CFO said. “Longer term, our firm transportation increases to just over 250,000 b/d by the end of 2020, which is consistent with our forecasted production growth…
“We try to move our other products to higher priced markets as well, and today we move about 60% of our gas out West priced at the SoCal index. Once Gulf Coast Express comes online in the fourth quarter, we'll move about 300 MMcf/d of gas to the Gulf Coast, that we priced on a Houston Ship Channel price index…”
Pioneer fetched an average $2.50/Mcf price for its gas in the first quarter. The realized oil price was $49.38/bbl, while natural gas liquids prices averaged $22.79. Adjusting for the cash flow uplift attributable to the FT contracts, the average oil price would have increased by $8.18/bbl to $57.56.
Pioneer has initiatives underway to reduce general and administrative (G&A) costs that are expected to save $100 million/year net “and create a leaner reporting structure that facilitates greater transparency, accountability and strong, consistent execution.”
Plans are underway to sell a 27% stake in Targa Resources Corp.’s natural gas infrastructure in the Permian Midland to reduce capital costs and increase free cash flow. The company during the first quarter completed the sale of its Eagle Ford Shale portfolio for $475 million in proceeds.
Permian production averaged 320,000 boe/d, at the top end of guidance, with natural gas output of 360,620 Mcf/d, down from year-ago gas production of 378,869 Mcf/d. However, oil production increased year/year to 206,256 b/d from 182,519 b/d.
Seventy-one horizontal wells were turned to sales in the first three months of the year, with total capital expenses of $928 million.
Net income totaled $350 million ($2.06/share), versus $178 million ($1.04) in the year-ago period. Operating net cash improved to $604 million from $555 million.
Pioneer is forecasting production in 2Q2019 to average 313,000-328,000boe/d, with oil output averaging 198,000-208,000 b/d. For the year, Permian output is forecast to increase by 12% year/year to average 320,000-335,000 boe/d, with oil production up 17% at 203,000-213,000 b/d.
The company is maintaining its 2019 drilling, completions and facilities capital budget of $2.8-3.1 billion and expects it to be fully funded with cash flow estimated at $3.75 billion.
On average, 21-23 rigs are set to run in the Permian through the year, with 265-290 wells turned to sales versus 270 last year. Average lateral lengths are expected to be 9,800 feet, with estimated ultimate recovery of around 1.6 million boe/well.