Pioneer Natural Resources Co. will limit its net annual oil production growth to 0-5% even if the oil price hits $150, a possibility that CEO Scott Sheffield is not ruling out.

Pioneer

“I’m getting more and more confident about the long-term oil strip being much higher than we had expected,” Sheffield told analysts on Thursday during a call to discuss fourth-quarter and full-year 2021 earnings. 

Nonetheless, “We’re not going to change…at $100 oil, $150 oil, we’re not going to change our growth rate,” Sheffield said. “We think it’s important to return cash back to the shareholders.”

Irving, TX-based Pioneer is the largest operator in the Permian Basin, with operations increasingly concentrated in the Midland sub-basin.

Oil prices “could easily go to $150,” the CEO said. “Demand is stronger than it ever has been in the world, and OPEC and OPEC-plus [are] going to run out of capacity by the end of ‘22. That’s even been stated by several OPEC and OPEC-plus countries.” 

Sheffield added, “that’s ignoring the Iran and the Ukraine situation.”

Regarding the industry, Sheffield said “it’s been interesting watching some of the announcements. So far the public independents are staying in line. I’m confident they will continue to stay in line.”

He added, “The private independents, a few of them as we all know, are growing. They’ve announced growth rates in the 15 to 25% per year range.”

Companies growing at this rate, however, “are going to run out of inventory fairly quickly,” Sheffield said. 

What are Pioneer’s Capex Plans?

Pioneer is forecasting a 2022 total capital budget of $3.3 to $3.6 billion, which it expects to be fully funded by cash flow. COO Richard Dealy said that 50% of the capital program is locked in and protected from inflation, while the other half includes forecast incremental inflation of about 10%.

Pioneer plans to allocate 35% of cash flow to capital expenditures (capex) this year, in order to support production growth of no more than 5%.

Dealy also noted that Pioneer has “the largest and most contiguous acreage position” in the Midland sub-basin.

Pioneer plans to operate 22-24 horizontal drilling rigs on average in the Midland throughout 2022, and to place 475-505 wells on production.

Pioneer is forecasting 2022 oil production of 350,000-365,000 b/d and total production of 623,000-648,000 boe/d.

This compares to 2021 oil production of 356,986 b/d and total production of 617,332 boe/d. Natural gas output averaged 703.9 MMcf/d for the full year.

Who Is Still Flaring In The Permian?

On the environmental front, Pioneer is targeting net zero scope 1 and 2 emissions by 2050, and has adopted a goal to reduce freshwater used in completion activities to 25% by 2026. Scope 1 refers to direct emissions from Pioneer’s operations, while Scope 2 refers to Pioneer’s electricity consumption.

By 2030, Pioneer is aiming to reduce emissions intensity by 50% versus a 2019 baseline.

Sheffield cited that natural gas flaring by Permian operators has plunged over the last two years from around 750 MMcf/d to under 200 MMcf/d.

He noted that Pioneer and many other publicly traded Permian operators have driven flaring intensity to below 1% “and continue to make improvements. Long-term we hope companies will go less than 0.5% and eventually down to 0.2%.” 

He said that a handful of private operators continue to vent and flare much higher percentages of their gas output.

“We still somehow need to take action on those [types of] companies,” Sheffield said. “They need to operate more [responsibly] and take the necessary actions to reduce their flaring intensity.”

Are Natural Gas Takeaway Constraints Looming? 

Asked about natural gas takeaway constraints in the Permian Basin, Dealy said the Permian likely will need an additional 2 Bcf/d of capacity every couple of years even with companies growing at modest rates.

“There’s a couple of pipelines that are in the works right now that are looking for commitments and we’re evaluating those and most likely, we will take volumes on one of those…”

Dealy estimated that Pioneer moves about 35% of its gas to the California market, 45-50% to the Gulf Coast market, and at least 15-20% to the Waha market. 

“Longer term, I think we’ll reduce that Waha exposure as we move more gas out of the basin,” he added.            

Record Free Cash Flow   

“Pioneer delivered a strong quarter with production in the upper half of guidance, contributing to our record annual free cash flow generation of $3.2 billion in 2021,” said Sheffield. “This significant free cash flow supported the return of $1.9 billion in 2021 to shareholders through our base-plus-variable dividend program and opportunistic share repurchases.”

He added, “Our deep Midland basin inventory of high-return well locations, coupled with best-in-class margins and operating efficiencies, provides attractive corporate returns that generate durable cash distributions through commodity price cycles. 

“The company’s high-return asset base and low-cost structure, combined with our leading environmental, social and governance practices, continue to drive significant value for Pioneer shareholders.”

Pioneer’s 4Q drilling, completion and facilities capex totaled $914 million, with total capex, including water infrastructure, totaling $941 million, management said. For the full year 2021, Pioneer’s drilling, completion, and facilities capex was $3.3 billion, with total capex including water infrastructure totaling $3.4 billion.

Pioneer reported an average realized oil price of $76.38/bbl during the fourth quarter. Natural gas liquids (NGL) fetched $38.45/bbl, while the average realized natural gas price was $5.20/Mcf.

These figures are up from $40.94/bbl, $18.51/bbl and $2.37/Mcf, respectively, in 4Q2020.

Production costs including taxes averaged $9.23/bbl/boe, management said.

The company placed 534 horizontal wells on production during the full year. 

“Pioneer’s large, contiguous acreage position in the high-margin, high-return Midland basin provides many opportunities that drive a [capital] efficient program,” the company said. “These include an increase in the development of 15,000 foot laterals, of which the company expects to place approximately 50 of these wells on production in 2022.”

In addition, “Pioneer has invested in significant water infrastructure, constructing one of the largest water supply and distribution systems in the Midland basin,” management said. “This water infrastructure helps Pioneer to efficiently execute its large drilling program, while minimizing the use of freshwater by using non-potable reclaimed water from the cities of Midland and Odessa, and recycled produced water from Pioneer’s production operations.”

Pioneer is using two simultaneous fracturing, aka simul-frac crews, in a drive to improve efficiency on the well pad, and is considering adding a third simul-frac crew in the latter part of 2022.

Pioneer reported net income of $763 million ($3.12/share) for the fourth quarter, versus a profit of $43 million (26 cents) in 4Q2020. Full-year net income was $2.12 billion ($9.06/share) in 2021, versus a net loss of $200 million (minus $1.21) in 2020.