Pioneer Natural Resources Co. is joining a growing list of exploration and production (E&P) companies that are moving some of their mature oil and natural gas assets into master limited partnerships (MLP). The Dallas-based producer last week announced that it will spin off two MLPs, one to hold its Spraberry assets in West Texas, the other to hold its Raton Basin properties in southern Colorado.
Five publicly traded E&Ps spun off MLPs in 2006, and several are expected to debut this year, according to Lehman Brothers (see NGI, March 12).
The MLP holding the Spraberry assets will launch in 4Q2007; the Raton Basin partnership will spin off in 2008. About $250 million of each partnership's units are to be offered to the public, with Pioneer as majority owner and general partner. Pioneer also plans to continue to own and operate a partial working interest in the assets forming the MLPs.
The MLPs are expected to help Pioneer increase the values of its proved reserves and allow it to pursue acquisitions through joint bidding with the MLPs. Pioneer also would be able to sell its proved reserves to the MLPs and apply the proceeds to fund additional low-risk opportunities and share repurchases.
Pioneer's assets are sprawled across North America, South Africa and Tunisia, but its U.S. assets make up the core of the company.
The Spraberry field covers eight West Texas counties, producing sweet crude and gas from formations between 6,700-9,200 feet deep. Pioneer is the largest operator in the field, with interest in 3,500 wells and an inventory of drilling locations. In the Raton Basin, Pioneer's acreage includes 1,300 producing coalbed methane gas wells and the opportunity to drill at the current rate of 300 wells for several years.
Standard & Poor's Ratings Services (S&P) said the properties associated with Pioneer's proposed MLPs are "mature, long-lived, slow-producing and relatively predictable." Credit analyst Ben Tsocanos said the formation of the partnerships is unfavorable to the company's credit quality "because lower-risk reserves are removed from the company's direct asset base, and because proceeds are likely to be used to fund a recently announced increase in share repurchases."
However, Tsocanos said, "we expect that the amount of reserves associated with the formation of the MLPs will represent a relatively small proportion of Pioneer's total reserves. Sufficient flexibility exists in the company's credit profile at the current rating to absorb the transaction without change in rating or outlook."
Also last week, Pioneer's board approved a $450 million increase in its existing share repurchase program, which now authorizes the purchase of up to $750 million of its common stock.
In response to the Pioneer (PXD) announcement, Moody's Investors Service placed the company under review for downgrade.
"The review for downgrade signals a potential for structural or leveraging outcomes that could be incompatible with the existing ratings," Moody's said. "The negative outlook had already reflected PXD's ongoing strategic deliberations, insufficiently competitive unit full-cycle economics through 2006, and ongoing capital spending in excess of cash flow.
"We have believed that PXD's performance increased the potential for remedial actions that could be incompatible with its ratings, including that stock buybacks would remain a material element of PXD's plan, that it has been evaluating the potential benefits of forming an MLP for over a year, and that leveraging acquisitions could be an operational remedy. While PXD has reduced leverage with asset sales, it has continued to display comparatively weak patterns of (i) organic (drillbit) finding and development costs, (ii) organic reserve replacement, (iii) total unit full-cycle costs, and (iv) leveraged unit cash operating margin coverage of drillbit and total reserve replacement costs."
©Copyright 2007 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.