The harsh winter weather encountered in Texas last week took a bite out of Permian Basin giant Pioneer Natural Resources Co.’s oil production, but the company should make up the loss and more in 2021, CEO Scott Sheffield said Wednesday.
The winter storm last week knocked out about 30,000 b/d of oil output, but most is back online. The “current production trajectory will drive a strong exit-to-exit growth of approximately 8%, which sets up a very high capital efficiency in 2022 and beyond,” Sheffield said during a conference call to discuss fourth quarter results.
Management could consider taking a proactive approach to protect the Permian infrastructure from future weather events like the Texas ice storm. However, Sheffield indicated it was a rare event unlikely to happen again anytime soon.
“I think we’ll take lessons learned from and see what things happened,” Sheffield said. “But in general, it was such a 50-year event or 100-year event, whatever you look at it. We still want to be capital efficient about it. And so…no decisions today…
“We will definitely look at it just from a lesson to learn, but I would say that given the freak nature of it at this point, we don’t see any substantial changes that we would make.”
With an announced capital expenditure (capex) budget of $2.4-2.7 billion, oil and gas production is forecast to average 528,000-554,000 boe/d this year, with oil output of 307,000-322,000 b/d.
Production in 4Q2020 averaged 364,00 boe/d with oil output of 204,000 b/d.
A big boost to production and reserves this year is going to come from the takeover of fellow Permian pure-play Parsley Energy Inc., which was completed in mid-January. With the combination with Parsley, “we have a footprint of about 920,000 net acres with a substantial inventory of high-return wells,” COO Richard Dealy told analysts.
Mark It Zero
Most important, Pioneer is “zero exposure to federal lands,” he said. Pioneer works primarily in the Permian’s Midland sub-basin in West Texas, which is nearly all private land. Private lands would be unaffected by any future decisions to pause permitting on federal lands.
The plan this year is to run on average 18-20 drilling rigs and five to seven fracturing crews. Most of the work is weighted to the Midland, with about 5% trained on the twin Delaware sub-basin.
In the final three months of 2020, Pioneer placed 58 horizontal wells online, and there was a total of 255 wells turned to production in 2020. Drilling operations last year averaged 1,150 drilled feet/day, up 15% from 2019. It also averaged 1,850 completed feet/day, an increase of 16% year/year.
“We are continuing moving toward larger pads, which helps drive efficiencies,” Dealy said. “Other than the larger pad sizes in 2021, our development plan is very similar, both laterally and the well mix, compared to the 2020 program.”
The facilities costs per well have continued to decline as Pioneer progresses an optimization program begun in 2019. When compared to 2018, the facilities cost/well has fallen by about 40%, from $1.6 million-plus/well to $1 million. Controllable cash costs fell by 23% from 2019 and are forecast to decline by another 8% this year.
Based on forward oil price estimates for 1Q2021, the cash flow impact related to purchases and sales of oil and gas, including firm transportation, is expected to be a loss of $30-60 million.
Pioneer continues to build on its environmental, social and governance initiatives, Sheffield noted.
Among other things, Pioneer has incorporated greenhouse gas (GHG) and methane emission intensity reduction goals into its ESG strategy, with goals to reduce the GHG emissions intensity by 25% and methane emissions intensity by 40% by 2030, inclusive of the assets acquired from Parsley.
In addition, the company has adopted a goal to maintain the flaring intensity to less than 1% of natural gas produced. Pioneer has set a goal to end routine flaring by 2025.
During 4Q2020 realized West Texas Intermediate (WTI) oil prices averaged $40.94/bbl, with natural gas liquids averaging $$18.51/bbl and natural gas prices of $2.37/Mcf. Production costs, including taxes, averaged $7.01/boe. The net cash flow impact related to purchases and sales of oil and gas, including firm transportation, was a loss of $32 million.
Net income in 4Q2020 was $43 million (26 cents/share), compared with year-ago profits of $361 million $$2.16). For 2020, net losses totaled $200 million (minus $1.21), versus 2019 earnings of $773 million ($4.60).
The board approved an increase to the quarterly cash dividend to 56 cents/share. In addition, Pioneer is initiating a long-term variable dividend policy in 2021 designed to distribute up to 75% of the prior year’s annual free cash flow (FCF), after the base dividends. The variable dividends would begin in 2022 for up to 50% of FCF, assuming the average 2021 WTI price is above $42/bbl.
Management also said it had recently identified two marketing contracts that should have been accounted for as derivatives in the historical consolidated financial statements. The contracts were executed in 4Q2019 but they did not begin until last month (January 2021). They provided for transporting and selling purchased oil “at lower transport and storage costs as compared to similar costs in the company’s other contracts.” Pioneer plans to restate the relevant consolidated financial statements “to reflect the noncash mark-to-market corrections related to the derivative treatment of the contracts.”
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