Dallas-based Pioneer Natural Resources Co., whose Texas-rich oil and natural gas growth is driven by the Permian Basin, plans to operate 18 horizontal rigs in the Spraberry/Wolfcamp formations this year as it works toward 15%-plus overall compound annual production growth through 2026.

The management team helmed a conference call Wednesday morning to discuss quarterly and year-end results. The discussion centered around the continued gains in the Permian, where Pioneer is one of the leading leaseholders.

“Despite experiencing another year of downward pressure on oil prices, the company’s focus on execution, improving capital efficiency and maintaining a strong balance sheet allowed us to meet or exceed all of the company’s financial and operating goals for 2016 and deliver one of the best years in the company’s 20-year history” CEO Timothy L. Dove said.

“The key drivers of this strong performance were the continued success of Pioneer’s horizontal drilling program in the Spraberry/Wolfcamp and the outstanding efforts of our employees. As we enter 2017, we are well positioned to drill high-return wells, grow production and bring forward the inherent net asset value associated with this world-class asset.”

Production is forecast to grow from 15-18% this year, led by the Spraberry/Wolfcamp, where growth is expected to be 30-34% higher from 2016.

Pioneer has a “vision,” Dove said, to “grow production from 234,000 boe/d in 2016 to approximately 1 million boe/d in 2026. We expect to achieve this vision by continuing to drill high-return wells that will deliver organic compound annual production growth of 15%-plus and compound annual cash flow growth of approximately 20% over this 10-year period,” assuming an oil price of $55/bbl and a natural gas price of $3.00/Mcf.

“In addition, we expect to maintain our net debt to operating cash flow ratio below 1.0 times and improve corporate returns. We also expect to spend within cash flow beginning in 2018 and generate free cash flow thereafter.”

Including output from the Eagle Ford Shale and the Texas Panhandle, fourth quarter production climbed to 242,000 boe/d, up 3,000 boe/d sequentially, while 2016 production rose 15% year/year. Production growth was driven by the Spraberry/Wolfcamp horizontal drilling program, where total output increased 36% year/year; oil production rose 42%.

During the fourth quarter, the northern Spraberry/Wolfcamp horizontal rig count rose to 17 from 12. Sixty-six horizontals were placed online in the area between October and December. Of the 18 horizontal rigs scheduled to run in the Spraberry/Wolfcamp this year, 14 are designated for the northern part of the play, where 13 now are working with one to be raised in March. Four rigs are planned in the southern Wolfcamp joint venture.

Completions across the Permian continue to be finessed, management said. Pioneer is the largest acreage holder in the Spraberry/Wolfcamp, with 600,000 gross acres in the northern portion of the play and 200,000 gross acres in the southern Wolfcamp joint venture area. The contiguous acreage position allows for drilling horizontals with lateral lengths of 7,500-14,000 feet.

Pioneer has become something of an optimization well specialist in the Permian. Two years ago the producer launched an updated completion program for the Spraberry/Wolfcamp using longer laterals with optimized stage lengths, clusters/stage, fluid volumes and proppant concentrations. The objective was to improve well productivity by allowing more rock to be contacted closer to the horizontal wellbore.

To illustrate the impact of the optimization upgrades in the Permian, Pioneer noted that in 2013 and 2014, initial fracture stimulation designs, dubbed Version 1.0, relied on proppant concentrations of 1,000 pounds/foot, fluid concentrations of 30 barrels/foot, cluster spacing of 60 feet and stage spacing of 240 feet.

Beginning in mid-2015, Pioneer enhanced its fracture stimulation design using Version 2.0, with 1,400 pounds/foot of proppant, 36 barrels/foot of fluid, cluster spacing of 30 feet and fracture stage spacing of 150 feet. The Version 2.0 design increased the cost of a completion by about $500,000/well.

Pioneer has stepped up the optimization game even more. Early last year it began using Version 3.0 — raising proppant concentrations by up to 1,700 pounds/ foot, fluid concentrations of up to 50 barrels/foot, cluster spacing down to 15 feet and shorter stage spacing down to 100 feet. The design cost added $500,000 to $1 million/well from Version 2.0.

Version 3.0 is now the rage. In the final three months, Pioneer placed 66 horizontals online in the Spraberry/Wolfcamp, with 38 using the third version. Since the start of the year, 109 Version 3.0 wells have turned to sales, versus 151 wells placed on production since mid-2015 using Version 2.0.

“Production from the Version 3.0 completion optimization wells is continuing to outperform the Version 2.0 wells,” management said. “The incremental capital cost to complete the Version 3.0 wells…is paying out in less than one year at current prices.”

Drilling and completion cost/perforated lateral foot for all horizontal wells placed on production in the Spraberry/Wolfcamp area averaged $817/foot in 4Q2016, down 25% from early 2015. During the fourth quarter, Pioneer’s horizontal drilling and completion costs averaged $8.5 million for Wolfcamp B interval wells, $6.4 million for Wolfcamp A interval wells and $6.4 million for Lower Spraberry Shale interval wells. These wells had average perforated lateral lengths ranging from 8,200 feet to 9,500 feet.

Pioneer this year expects to place 260 gross horizontals on production in the Spraberry/Wolfcamp, with 220 in the northern area and 40 in the southern Wolfcamp The company also plans a limited appraisal program for the Clearfork, Jo Mill and Wolfcamp D intervals.

Estimated ultimate recoveries from the Permian wells this year are expected to average 1.5 million boe for Wolfcamp B, 1.2 million boe for Wolfcamp A and 1 million boe for Lower Spraberry wells. Expected costs to drill and complete Wolfcamp B wells are $8.5 million for a 10,000-foot lateral, while in Wolfcamp A costs are estimated at $7.5 million for a 9,500-foot lateral well. Lower Spraberry Shale wells are expected to run around $7.2 million for a 9,500-foot lateral.

To ensure its infrastructure needs meet growing Permian development, Pioneer is building out a water distribution system after reaching a landmark agreement in December with Midland, TX officials to upgrade the city’s wastewater treatment plant in return for a dedicated long-term supply of water. The 2017 program includes $10 million of engineering capital to begin work on the Midland upgrade, with $110 million earmarked through 2019. In return, Pioneer would receive 2 billion barrels of nonpotable water over a 28-year contract period to support its completion operations.

Also in the works is upgrading a sand mine Pioneer owns in Brady, TX, about 190 miles from the Spraberry/Wolfcamp field; about $30 million would be used this year to complete facilities.

On the natural gas side, Pioneer plans to spend for upgrades as part of its 27% interest in Targa Resources’ West Texas natural gas processing system and 30% stake in the West Texas Gas South Sales Ranch system. About $70 million is targeted for gas system compression and connections, with $45 million for gas processing capacity additions.

Meanwhile, other onshore projects still are in the mix, barely. A “limited” drilling program is to get underway during the second quarter in the Eagle Ford once again, with 20 well completions scheduled this year, including nine drilled but uncompleted wells and 11 new drills. Although limited, the new well program is designed to test “longer laterals and higher-intensity completions,” management said.

Production in the West Panhandle field in Texas was 7,000 boe/d during the fourth quarter, lower than planned following “continuing mechanical problems” at Pioneer’s Fain gas processing plant. Operations are being transferred to a third-party facility beginning in March. Because of “ongoing operational uncertainty” at the Fain plant, output in the first quarter should be about 7,000 boe/d, “consistent with actual results over the past six months when the plant was experiencing similar mechanical problems.”

Pioneer also is high-grading its portfolio, with plans are to sell about 10,500 net acres in the Eagle Ford; a data room is open. It agreed in January to sell 5,600 acres in the Permian for $63 million and now is “evaluating offers” to sell another 20,500 acres in Martin County, TX.

The 2017 capital program of $2.8 billion includes $2.5 billion for drilling/completions, funded from forecasted cash flow of $2.2 billion and cash on hand. Derivative positions are being maintained that cover 85% of forecasted 2017 oil production and 55% of natural gas output.

“We are assuming, overall, from the standpoint of what we’ve been hearing in the industry, has been discussed, an overall notional cost inflation probably in the neighborhood of 10-15% for the year,” Dove said. “I believe we’ll be able to keep our inflation numbers down to more like, approximately 5%. But the internal plan is to make sure that cost inflation is offset by our efficiency gains, which we’ve been able to prove for quite a long time now.”

The commodity price crunch impacted quarterly results, with a net loss of $44 million (minus 26 cents/share), which included a hedging loss of $142 million. Adjusted income in 4Q2016 was $85 million (49 cents/share). In the year-ago quarter, Pioneer lost $623 million (minus $4.17/share). For the year, the net loss was $556 million (minus $3.34/share), versus a 2015 loss of $273 million (minus $1.79).

NGI’s Shale Daily will be covering many North American-focused oil and gas operator results in the coming weeks. A calendar listing is available on the website.