As Crude-oil Price Rout Deepens, Pioneer Maintains its Bright Outlook

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--This month, as crude oil prices continued their downward spiral, Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas) was able to raise about $1.4 billion through a new common-stock offering. In fact, investors were so keen to buy the shares that the independent producer was able to expand the size of its offering, to 12 million shares from 10.5 million.

Pioneer's successful offering came as crude-oil prices were falling to levels not seen in a decade. And despite crude-oil's 75% price decline over the last 18 months, Pioneer's stock price has held up relatively well, falling only about 50% since mid-2014. By contrast, peers like Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas), Apache Corporation (NYSE:APA) (Houston, Texas), Continental Resources Corporation (NYSE:CLR) (Oklahoma City, Oklahoma) and Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) have seen their stocks fall by 70% or more over that same time.

Investors love Pioneer's stock because of the company's positive results from drilling in the Spraberry/Wolfcamp shale, located in the Permian Basin. That, plus an expected cash infusion of about $500 million in mid-2016 from the sale of its Eagle Ford Shale midstream assets, has helped the company weather the collapse of crude-oil prices. In fact, this month Pioneer told investors it planned to significantly increase its 2016 capital spending, to between $2.4 billion and $2.6 billion, up from 2015's $2.2 billion. This comes as most of Pioneer's peers are cutting their 2016 capital budgets. Pioneer also raised about $992 million in a December 2015 bond offering, whose proceeds will be used to retire bonds coming due in 2016 and 2017. The company estimated fourth-quarter production costs at $11 per barrel of oil equivalent (BOE) to $13 per BOE.

Click on the icon at right for a map of the Spraberry/Wolfcamp region.

Crude-oil production in the Permian Basin continues to grow, despite the collapse of oil prices, according to the January Drilling Productivity Report from the U.S. Energy Information Administration (EIA) (Washington, D.C.). The agency predicted overall crude oil production in the Permian basin will increase 5% this month, compared to December 2015, to an average level of slightly over 2 million barrels of oil per day (BBL/d). EIA projected production from new wells in February would outstrip declining production from legacy wells, continuing the basin's production growth. Crude oil production in the Permian Basin has roughly doubled since 2011, the agency added.

Click on the icon at right to see historical data and EIA's projection of January 2016 crude oil production in the Permian Basin.

Pioneer's bright outlook for the future is tied to its growing production in the Permian's Spraberry/Wolfcamp region. While its peers were lowering fourth-quarter and full-year 2015 production targets, in response to plummeting oil prices, Pioneer was raising its guidance. Fourth-quarter production surged to between 213,000 and 215,000 barrels of oil equivalent per day (BOE/d), well above its prior estimate of 206,000 BOE/d to 211,000 BOE/d, the company told investors this month. For all of 2015, the company will grow production by 12% over 2014's production, also an increase over prior guidance.

Looking into 2016, Pioneer predicted production would grow by 10% to 15% over 2015 numbers. Over the 2016-2018 period, the company told investors overall production would grow 15% annually, but that crude-oil production would increase at a faster pace, 20% or more, over those three years.

"Our Spraberry/Wolfcamp well results continue to justify robust drilling activity, even in a depressed commodity price environment," the company said in its January presentation to investors. For more on Pioneer's Spraberry/Wolfcamp assets and drilling plans, see August 24, 2014, article--Pioneer Plans Big Capital Outlay for Permian Plays. The company also has hedged a lot of its 2016 production: about one-third of first-half 2016 crude oil production is covered with swaps averaging $60 per barrel--over twice the current cash price--while the other two-thirds of first-half 2016 production is covered through three-way collars with an average call price of about $73 per barrel.

Like most of its peers, Pioneer expects to take a significant non-cash charge for asset impairment when it reports its full-year 2015 financial results. In its January investor presentation, the company estimated those charges could be $800 million to $1 billion.

Pioneer gained greater industry notoriety when it (and another company) exported a tanker of lightly-processed condensate in mid-2014. The company received permission to ship that tanker from the U.S. Commerce Department (Washington, D.C.), which ruled that lightly processed condensate where some of the liquefied petroleum gas (LPG) had been removed was not covered by the 40-year-old crude oil export ban. For more on that, see August 8, 2014, article--Would Scrapping Crude-Oil Export Ban Lower Gasoline Prices?and December 1, 2014, article--Gulf Coast Condensate Splitters: A Billion-Dollar Bet on U.S. Energy Policy. Late last month, the U.S. repealed the crude-oil export ban, and Pioneer said it expects to begin exporting crude in mid-2016. For more on the lifting of the crude-oil export ban, see December 22, 2015, article --Crude-Oil Producers Welcome End of Crude-Oil Export Ban.

In a December 2015 interview with the Midland Reporter-Telegram following the lifting of the crude-oil export ban, Scott Sheffield, Pioneer's chairman and chief executive, predicted "six more months of low prices--somewhere in the $30 to 35 a barrel range. That, I believe, will force OPEC to put together an agreement in the summer (of 2016), which will start the (price) recovery. I expect prices in 2017 to recover to $55 to $60 per barrel range."

"It's hard to know where the bottom is in terms of crude-oil prices, but Pioneer is one of the few bright spots among independent U.S. producers," commented Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "When global prices recover, we think many companies will study Pioneer's ability to find and exploit productive properties while keeping costs low."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.