Pioneer Acquisition Signals Deepened Commitment to Spraberry/Wolfcamp Play

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Scott Sheffield could have taken a victory lap. But rather than resting on his laurels, he went into overdrive. Since announcing his retirement May 19 as chief executive officer (CEO) of Oil & Gas company Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), Sheffield has overseen a $435 million acquisition of acreage in its core Spraberry/Wolfcamp play, raised $837 million in a stock offering, increased 2016 capital spending by $100 million to $2.1 billion and pledged to add five horizontal drilling rigs in its Permian acreage during the second half of 2016.

So far this year, Pioneer's stock has meaningfully outperformed peers like Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas), Apache Corporation (NYSE:APA) (Houston, Texas), Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma), Continental Resources Corporation (NYSE:CLR) (Oklahoma City, Oklahoma) and Occidental Petroleum Corporation (NYSE:OXY) (Houston, Texas).

Investors like Pioneer because of its strong balance sheet, focus on cost containment and limited geographic area of operation. Last year the company sold its Eagle Ford midstream business to concentrate on the Spraberry/Wolfcamp play in West Texas' Permian Basin. For more on that transaction, see January 22, 2016, article--As Crude-oil Price Rout Deepens, Pioneer Maintains its Bright Outlook.

Click on icon at right to see a map of the Spraberry/Wolfcamp play in the Permian Basin.

Crude oil production in the Permian Basin slipped a bit last month, to about 2 million barrels per day (BBL/d). But that area is the only shale formation to increase production on a year-over-year basis, according to the U.S. Energy Information Administration's (EIA) most recent Drilling Productivity Report. In July 2015, crude oil production in the Permian was about 1.7 million BBL/d, EIA reported.

Click on the icons at right to see Permian crude-oil production from 2007 to 2016 and a year-over-year comparison of crude-oil production from all major shale formations in the U.S.

When Sheffield became Pioneer's CEO in 1997, the company had revenue of $546 million and produced about 36,903 BBL/d. The company had small operations in Argentina and Canada as well as the Permian Basin, Gulf Coast and Midcontinent regions.

Today, Pioneer's revenue exceeds $4.8 billion, and it produces over 122,000 BBL/d. The operations in Canada and Argentina were sold long ago. The company's production comes mainly from the Spraberry/Wolfcamp play in the Permian basin, with smaller amounts coming from South Texas, the Texas Panhandle and the Eagle Ford shale. It also owns property in southern Colorado. Crude oil accounted for about 55% of its first-quarter 2016 hydrocarbons production.

In announcing Sheffield's retirement as CEO, Lead Director Ken Thompson said, "Scott Sheffield has truly been a visionary leader in the energy industry." He lauded the outgoing CEO for building "one of the premier oil shale resource companies in the United States. Despite the challenges facing the energy industry today, Pioneer is in excellent financial shape with great assets and a strong, experienced leadership team in place. Pioneer's corporate culture is second to none thanks to Scott, and it shows in our people, assets, balance sheet and top-tier performance."

The dealmaking's not done yet. In announcing it was buying 28,000 acres of West Texas land from Devon June 15, Pioneer said it planned to swap about 13,000 of those for acreage even closer to its existing operations in the Spraberry/Wolfcamp. Pioneer also said it was readying plans to deploy an additional five horizontal rigs in that play in the second half of the year, assuming crude-oil prices supported the move. That accounted for the $100 million increase in 2016's capital spending plan, to $2.1 billion.

Pioneer will pay about $15,500 per acre for the land it purchased from Devon, a lot less than it would have paid if it bought when crude oil prices were high. Three years ago, some Midland Basin acreage reportedly changed hands at prices up to $35,000 per acre. If Pioneer bought that acreage back then, it would have paid close to $1 billion.

The addition of five rigs is expected to have a minimal impact on Pioneer's forecasted 2016 production growth rate of something over 12%. But in 2017, the new rigs are expected to contribute to a 13% to 17% gain in production. Pioneer is the largest acreage holder in the Spraberry/Wolfcamp play. This month, the company told investors it has decades of drilling inventory in that play, and it is well positioned to weather the current low commodity price environment.

Although Pioneer, like many of its peers, reported net losses for the first quarter, the company has narrowed losses by lowering its lease operating expenses (LOE) on a year-over-year basis by about 34%, to $5.20 per barrel produced from $7.83 per barrel produced in the first quarter of 2015, company officials told investors this month. Even at current low prices, company officials told investors the Spraberry/Wolfcamp acreage it recently acquired from Devon will produce internal rates of return (IRR) exceeding 50% at today's prices.

The company also told investors it continues to evolve its hydraulic fracturing techniques, which has increased well production. In 2013-14, it used about 1,000 pounds of proppant per foot of lateral and about 30 barrels of fluid per foot of lateral. Now, in Version 2.0, it is using about 1,400 pounds of proppant per foot of lateral and 36 barrels of fluid per foot of lateral. It currently is testing what it calls Version 3.0, where up to 1,700 pounds of proppant and 50 barrels of fluid will be used per foot of lateral.

Declining crude-oil production from non-OPEC nations, chiefly the U.S., coupled with modest global demand growth, create a strong fundamentals case for Pioneer. In 2014, the company won approval to export lightly processed condensate, the first time the U.S. Department of Commerce allowed export of that product in 40 years. Commerce ruled that removing some of the liquefied petroleum gas (LPG) from the condensate made it a refined product, which was not covered by the now-lifted crude-oil export ban. For more on that, see August 8, 2014, article--Would Scrapping Crude-Oil Export Ban Lower Gasoline Prices? So as supply disruptions continue in Nigeria and Venezuela, among other areas, Pioneer stands ready to ship its ultra-light-crude to world markets. For more on that, see June 16, 2016, article--Price Pain for Oil & Gas Expected to Continue Until Demand Surges.

"The Pioneer story is a story of a company that stayed close to home and stuck to its knitting while many of its peers were entering new markets far from their core," remarked Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals Industries. "Pioneer didn't get carried away when crude oil exceeded $100 per barrel. It kept its eye on the ball, cut operating costs and didn't take on too much debt. Now, it is able to make strategic acquisitions that expand its already-strong position in a rising Permian play."

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