Pioneer Natural Resources Company (NYSE:PXD) announced financial and operating results for the quarter ended March 31, 2013.
Pioneer reported first quarter net income attributable to common stockholders of $101 million, or $0.75 per diluted share (see attached schedule for a description of the net income per diluted share calculation). Without the effect of noncash derivative mark-to-market losses and other unusual items, adjusted income for the first quarter was $136 million after tax, or $1.02 per diluted share.
First quarter and other recent highlights included:
- producing 171 thousand barrels oil equivalent per day (MBOEPD) in the first quarter, an increase from the fourth quarter of 2012 of 6 MBOEPD, or 4%, as a result of continued strong production growth from the Company’s drilling programs in the liquids-rich Spraberry vertical, horizontal Wolfcamp Shale and Eagle Ford Shale areas;
- continuing to deliver strong horizontal drilling results in the southern Wolfcamp joint interest area, including nine new Wolfcamp B wells placed on production during the first quarter with an average peak 24-hour initial production rate of 911 barrels oil equivalent per day (BOEPD);
- pumping more cost-efficient slickwater fracture stimulations on five Wolfcamp B wells in the southern Wolfcamp joint interest area (saving up to an estimated $1 million per well) with encouraging results;
- nearing the expected early June closing date for the Sinochem joint interest transaction;
- progressing the northern horizontal Spraberry/Wolfcamp drilling program, with Pioneer’s first Wolfcamp B interval well in Martin County recently fracture stimulated;
- increasing from one horizontal rig to five horizontal rigs in the northern Spraberry/Wolfcamp area during the second quarter; of the four-rig increase, three rigs were planned and one is being added to focus on developing the Hutt lease in Midland County (capital for the incremental rig is expected to be absorbed in the existing 2013 drilling budget of $2.75 billion);
- focusing three rigs of the five-rig northern horizontal program on the Wolfcamp Shales and two rigs on the Jo Mill and Spraberry Shales;
- continuing to deliver significant incremental production from deeper vertical drilling in the Spraberry field;
- delivering record Eagle Ford Shale net production of 37 MBOEPD, an increase of 7% from the fourth quarter of 2012;
- completing the Company’s Alaska winter drilling program, including (i) the successful fracture stimulation of four horizontal wells from the Company’s island drill site; the wells are currently being placed on production with the first two wells having achieved peak gross production rates to date of approximately 3,500 barrels oil per day (BOPD) and 3,000 BOPD (both wells still unloading), and (ii) the drilling of an appraisal well in the Torok interval from an onshore drill site, which increases Pioneer’s original resource potential of 50 million barrels of oil (MMBO) for this interval to 75 MMBO to 100 MMBO; and
- adding gas derivative positions for the 2013 through 2016 period.
Scott Sheffield, Chairman and CEO, stated, “As the third largest driller in the U.S., the Company delivered another strong quarter, with production exceeding expectations. Our three liquids and resource-rich core assets in Texas, the Spraberry vertical, the horizontal Wolfcamp Shale and the Eagle Ford Shale, were the drivers of this significant increase. Importantly, oil production grew 10% in the first quarter of 2013 compared to the fourth quarter of 2012.
“Our extensive geologic and engineering evaluation of the resource potential of the Spraberry/Wolfcamp area ranks it as the largest oil field in the United States. Pioneer’s 900,000-acre leasehold position in the Spraberry/Wolfcamp holds multiple prospective horizontal targets with an aggregate estimated resource potential of more than 4.6 billion barrels oil equivalent (BBOE). Our joint interest agreement with Sinochem is allowing the horizontal development of the Wolfcamp Shale over our southern 200,000 acres to be accelerated, and we are now ramping up our appraisal activity of the Wolfcamp, Jo Mill and Spraberry Shales across our northern acreage. We are confident that Pioneer will add substantial net asset value as these plays are developed.”
Mark-To-Market Derivative Losses and Unusual Items Included in First Quarter 2013 Earnings
Pioneer’s first quarter earnings included unrealized mark-to-market losses on derivatives of $60 million after tax, or $0.45 per diluted share.
First quarter earnings also included income of $25 million after tax, or $0.18 per diluted share, related to the following unusual items:
- Net gain on the sale of unproved properties of $14 million after tax, or $0.10 per diluted share,
- Alaska production tax credit recoveries of $12 million after tax, or $0.09 per diluted share and
- Rig contract termination fees of $1 million after tax, or $0.01 per diluted share.
Operations Update and Drilling Program
Pioneer’s successful horizontal Wolfcamp Shale and Jo Mill drilling results in the Spraberry Trend Area field have led the Company to shift a significant portion of its 2013 drilling activity from vertical drilling to more capital-efficient horizontal drilling. Pioneer is the largest acreage holder in the Spraberry Trend Area field, where the Company believes it has greater than 4.6 BBOE of estimated resource potential from horizontal drilling based on its extensive geologic data and its successful drilling results to date.
The Company has signed an agreement with Sinochem to sell 40% of Pioneer’s interest in 207,000 net acres leased by the Company in the southern portion of the Spraberry Trend Area field for total consideration of $1.74 billion. At closing, Sinochem will pay $522 million in cash to Pioneer, before normal closing adjustments, and will pay the remaining $1.2 billion by carrying a portion of Pioneer’s share of future drilling and facilities costs. The transaction is estimated to close during June, subject to governmental approvals.
Under the agreement, Sinochem will acquire 82,800 net acres of Pioneer’s leasehold in the Wolfcamp horizon. Pioneer retains 60% of its interest in the Wolfcamp and deeper horizons, with Sinochem receiving 40% of Pioneer’s interest. Pioneer will continue as operator and will conduct all leasing, drilling, operations and marketing activities in the joint interest area. The joint interest area covers defined portions of Upton, Reagan, Irion, Crockett and Tom Green counties in Texas. Pioneer retains its current working interests in all horizons shallower than the Wolfcamp horizon.
In addition to funding its own drilling obligations for the horizontal Wolfcamp Shale, Sinochem has agreed to fund 75% of Pioneer’s portion of drilling and facilities costs after closing until the $1.2 billion of drilling carry is fully utilized. At closing, Sinochem will pay its 40% share of net expenditures in the joint interest area from the December 1, 2012 effective date of the transaction to the closing date. Pioneer and Sinochem have agreed to a development plan which forecasts the drilling of 86 horizontal Wolfcamp Shale wells during 2013, increasing to 120 wells in 2014 and 165 wells in 2015.
The thickness of the Wolfcamp B interval in the southern joint interest area provides the opportunity to complete two stacked laterals in this interval (referred to as the Upper B and Lower B intervals). The Company placed nine new horizontal wells on production in the Upper B interval during the first quarter of 2013 with an average peak 24-hour initial production rate of 911 BOEPD, with oil comprising 82% of the production. Eight of the wells had an average lateral length of approximately 7,100 feet, while the ninth well was a longer lateral at approximately 9,600 feet. The performance of these nine wells coupled with the 28 horizontal wells previously placed on production by Pioneer in the southern Wolfcamp joint interest area reinforces the Company’s estimate that wells in this area will deliver an average estimated ultimate recovery (EUR) of at least 575 thousand barrels oil equivalent (MBOE) over the life of the well.
Pioneer operated seven rigs in the southern Wolfcamp joint interest area during the first quarter of 2013 and plans to continue at this level through the end of the year. An increase of three rigs per year is expected in 2014 and 2015. The 2013 drilling program will continue to focus on delineating acreage and testing multiple Wolfcamp intervals, while the program in 2014 and beyond will primarily focus on development drilling and accelerating production growth. Approximately 70% of the wells drilled in this area during 2013 will be from pads. The Company has included “science” expenditures of $20 million in the 2013 southern Wolfcamp joint interest area drilling budget for coring, open-hole logging, micro-seismic and 3-D seismic. The cost for horizontal development wells is targeted at $7.5 million to $8.0 million for an 8,300-foot lateral well. The Company expects to drill more than 20 laterals that extend the lateral length to approximately 10,000 feet during 2013. These longer lateral wells are expected to generate an EUR increase of 40% to 60% at an incremental cost of 20%. Completion techniques will continue to be optimized and downspacing opportunities are being evaluated. In particular, slickwater fracture stimulations are being tested. The Company has pumped five Wolfcamp B slickwater fracture stimulations year-to-date in the southern Wolfcamp joint interest area with encouraging results. Slickwater fracture stimulations are expected to save up to $1 million per well compared to the hybrid fracture stimulations that Pioneer has been utilizing in this area.
During the fourth quarter of 2012, Pioneer completed two highly successful horizontal Jo Mill wells in Upton County. The two wells had an average 24-hour initial production rate of 503 BOEPD with short laterals of approximately 2,500 feet. The peak 30-day rates for these two wells averaged 434 BOEPD, with oil comprising 80% of the production, and when normalized to 5,000 feet, the wells have continued to outperform the 650 MBOE EUR type curve that reflects the performance of the two horizontal Wolfcamp Shale B interval wells that were drilled in the Giddings area of Upton County by Pioneer in 2011.
During the first quarter, Pioneer announced that it would be initiating a $1 billion capital program for 2013 and 2014 to accelerate the horizontal appraisal of the Company’s northern Spraberry/Wolfcamp acreage. The 2013 drilling program, which is estimated to cost $400 million, is expected to drill a total of 30 to 40 wells targeting six different “stacked” intervals. The six “stacked” intervals across the Company’s 600,000 prospective gross acres equate to greater than 3 million prospective gross acres. Fifteen wells to 20 wells will be completed in the Wolfcamp A, B and D intervals. Another 15 wells to 20 wells will be completed in the Jo Mill, Middle Spraberry and the Lower Spraberry Shales. The cost for these wells is expected to range from $7.5 million to $8.5 million per well assuming 7,000-foot laterals. This cost excludes $80 million of estimated “science” and infrastructure costs.
Pioneer’s initial rig in the northern acreage has drilled the Company’s first three horizontal Wolfcamp Shale wells in this area – two in Midland County and one in Martin County. The first well (DL Hutt C #1H) was completed in the Wolfcamp B interval in Midland County during January and had a lateral length of 7,380 feet. It has been the best horizontal well drilled in the Wolfcamp Shale play to date, with an initial peak 24-hour production rate of 1,693 BOEPD and an average peak 30-day rate flowing naturally of 1,402 BOEPD. The well has been on production for a little more than one hundred days and has produced a total of 100 MBOE, with an oil content of 75%. The performance of this well is substantially above the 650 MBOE EUR type curve for the previously discussed Giddings area wells.
The second horizontal well in Midland County was drilled in the Wolfcamp A interval and is scheduled to be completed in late May/early June. Since this well was drilled in close proximity to the DL Hutt C #1H, its completion was intentionally delayed so that an extended production test could be done on the DL Hutt C #1H well. This well will have to be shut in during the fracture stimulation of the Wolfcamp A interval well to avoid any possible interference.
The initial rig moved from Midland County and drilled the Company’s first horizontal Wolfcamp B well in Martin County. This well was recently fracture stimulated.
The Company is increasing its horizontal rig count in the northern drilling area from one rig to five rigs during the second quarter. Of the four additional rigs, three rigs were envisioned in the original plan. The incremental rig is being added as a result of the three planned rigs arriving later than originally anticipated. The cost for this rig is expected to be absorbed in the 2013 drilling budget.
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