Cost reductions and efficiency gains are driving positive results in the Spraberry/Wolfcamp for Pioneer Natural Resources Co., and it is sticking with plans to add rigs in the Northern Midland Basin at a time when some peers are being crushed by low commodity prices. To fund increased drilling, Pioneer raised its spending plans for 2015.

“Our horizontal drilling program in the Spraberry/Wolfcamp continues to generate strong margins and returns in a weak commodity price environment due to our aggressive pursuit of cost reductions and efficiency gains combined with our highly productive wells,” said CEO Scott Sheffield. “As a result, we are putting rigs back to work and plan to return to an activity level during 2016 that can result in a similar growth trajectory that we were delivering in the second half of 2014 before the downturn.”

The company reported second quarter production gains in the Permian Basin last month (see Shale Daily, July 22), and plans are to keep turning drill bits as costs decline further.

“We’re showing a 20% to 25%, already, decrease in drilling and completion costs compared to 2014,” Sheffield told analysts during a conference call Wednesday. “We expect capital costs to decline by greater than 30% going into 2016. We’re seeing a 20% reduction in horizontal tank battery construction costs; already expect that number to be greater than 25%…17% reduction already in [lease operating expense] in the second quarter versus all of 2014.”

Pioneer reported a second quarter net loss of $218 million (minus $1.46/share) compared with profit of $1 million (1 cent/share) in the year-ago quarter. Without the effect of noncash derivative mark-to-market losses and other unusual items, adjusted income for the second quarter was $15 million after tax (10 cents/share).

The company is maintaining a production growth forecast for 2015 of 10%-plus, reflecting an increase in forecasted Spraberry/Wolfcamp production growth from 20%-plus to 22-24% offset by a reduction in the full-year growth rate for the Eagle Ford Shale.

Pioneer is the largest acreage holder in the Spraberry/Wolfcamp with about 600,000 gross acres in the northern portion of the play and 200,000 gross acres in its southern Wolfcamp joint venture area. Pioneer said it has more than 10 billion boe of net recoverable resource potential from horizontal drilling across its entire acreage position.

The company is planning to add an average of two horizontal rigs per month in the northern Spraberry/Wolfcamp during the second half of 2015; four rigs have already been added. Pioneer is also planning to add eight horizontal rigs in the first quarter of 2016, of which six rigs will be added in the northern Spraberry/Wolfcamp and two will be added in the Eagle Ford. This rig ramp is expected to bring horizontal drilling activity back to the level it was prior to the oil price collapse in late 2014.

As a result, the capital budget for 2015 has been increased from $1.85 billion to $2.2 billion. The budget includes $1.95 billion for drilling-related activities and $250 million related to the development of Spraberry/Wolfcamp water infrastructure, vertical integration and facilities.

Hedging will continue, with Pioneer maintaining coverage for 2015 forecasted oil production at about 90%, with most of the volumes protected by swaps at $71/bbl. Plans are to increase coverage for 2016 forecasted oil production to 75% using three-way collars and maintain coverage for forecasted gas production of about 85% for 2015 and about 65% in 2016 using a combination of swaps and three-way collars.

“Our strong balance sheet, excellent returns and superior derivatives position through 2016 provide us the flexibility to adjust this rig ramp based on the company’s commodity price outlook and continuing efficiency improvements,” Sheffield said.

Topeka Capital Markets analyst Gabriele Sorbara affirmed a “buy” rating on the company and gave a nod to Pioneer’s strategy in a note Wednesday. Pioneer “…remains one of our top picks given their strong balance sheet, solid hedge book and position in the Permian Basin ahead of re-acceleration in what we believe will be an improved environment,” the analyst said.