Pioneer Natural Resources Company (NYSE:PXD) announced financial and operating results for the quarter ended December 31, 2012, and announced its 2013 capital budget.
Pioneer reported fourth quarter net income attributable to common stockholders of $29 million, or $0.22 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 gains and other unusual items, adjusted income for the fourth quarter was $107 million after tax, or $0.83 per diluted share.
Fourth quarter and other recent highlights included:
- producing 165 thousand barrels oil equivalent per day (MBOEPD) in the fourth quarter, including Barnett Shale production (the Barnett Shale properties were reclassified from discontinued operations to continuing operations after the decision was made to discontinue efforts to divest of these properties),
- producing 156 MBOEPD in the fourth quarter, excluding Barnett Shale production, which was in the middle of the Company’s fourth quarter guidance range of 154 MBOEPD to 158 MBOEPD (fourth quarter guidance excluded Barnett Shale production since it was classified as discontinued operations when the fourth quarter guidance was provided),
- producing 156 MBOEPD from continuing operations in 2012 (includes Barnett Shale production), an increase of 29% compared to 2011 and at the top end of Pioneer’s full-year 2012 guidance; the strong production growth in 2012 was driven by the Company’s drilling programs in the Spraberry vertical, horizontal Wolfcamp Shale, Eagle Ford Shale and Barnett Shale Combo areas,
- delivering 264% drillbit reserve replacement (161 million barrels oil equivalent) at a drillbit finding and development cost, excluding pricing revisions, of $17.72 per barrel oil equivalent (BOE),
- placing on production Pioneer’s first horizontal Wolfcamp Shale well in the B interval in Midland County, Texas, (24-hour peak initial flow rate of 1,693 barrels oil equivalent per day (BOEPD) and peak 20-day average natural flow rate of 1,510 BOEPD with approximately 75% oil content), which demonstrates the prospectivity of Pioneer’s northern Wolfcamp/Spraberry acreage that encompasses more than 600,000 gross acres,
- initiating a two-year $1.0 billion horizontal drilling appraisal program of Pioneer’s northern Wolfcamp/Spraberry acreage, of which $0.4 billion is included in the 2013 drilling budget of $2.75 billion and the remainder is expected to be spent in 2014,
- forecasting annual production growth of 12% to 16% from 2012 to 2013,
- targeting 13% to 18% compound annual production growth for 2013 to 2015,
- signing a $1.74 billion horizontal Wolfcamp Shale joint interest agreement with Sinochem, which equates to $21,000 per acre for approximately 10% of Pioneer’s aggregate Wolfcamp/Spraberry gross acreage position,
- continuing to deliver improving horizontal Wolfcamp Shale results in the joint interest area, including:
- placing on production Pioneer’s first horizontal Wolfcamp Shale well with a 10,000-foot lateral in the Upper B interval in Reagan County (24-hour peak flow rate of 1,203 BOEPD and peak 20-day average flow rate of 1,022 BOEPD with approximately 80% oil content);
- placing on production Pioneer’s first Wolfcamp Shale Lower B interval well and a successful Wolfcamp Shale A interval well in Reagan County (both currently producing above type curve expectations);
- well performance from existing wells continuing to meet type curve expectations; and
- achieving targeted year-end 2012 horizontal Wolfcamp Shale production exit rate of 5 MBOEPD; and
- increasing the Company’s estimated net resource potential from 6.7 billion barrels oil equivalent (BBOE) to greater than 8.0 BBOE, which includes 1.6 BBOE from the southern horizontal Wolfcamp Shale joint interest area and 3.0 BBOE from Pioneer’s northern Wolfcamp/Spraberry acreage.
Scott Sheffield, Chairman and CEO, stated, “Pioneer had another great year in 2012. We delivered strong production and reserve growth, while continuing to be among the top performers in our peer group in total shareholder return. Our extensive Midland Basin geologic analysis has identified multiple prospective horizontal targets throughout Pioneer’s extensive 900,000-acre Wolfcamp/Spraberry leasehold position with an aggregate estimated resource potential of more than 4.6 BBOE. During 2012, we focused on appraising and developing the southern 200,000 acres of the play. This culminated in the signing of the joint interest agreement with Sinochem that will allow horizontal development of the Wolfcamp Shale in this area to be accelerated. We were also able to begin drilling horizontal wells on our northern acreage to appraise the potential of the horizontal Wolfcamp Shale in this area. Early results are extremely encouraging, and we are initiating a $1 billion dollar appraisal program for 2013 and 2014 to confirm the estimated 3.0 BBOE of resource potential we believe exists in our northern acreage, which should add substantial net asset value to the Company.”
Mark-To-Market Derivative Gains and Unusual Items Included in Fourth Quarter 2012 Earnings
Pioneer’s fourth quarter earnings included unrealized mark-to-market gains on derivatives of $14 million after tax, or $0.11 per diluted share.
Fourth quarter earnings also included a net charge of $92 million after tax, or $0.72 per diluted share, related to the following unusual items:
- a noncash impairment charge of $101 million after tax, or $0.78 per diluted share, to reduce the proved and unproved property basis of the Company’s Barnett Shale assets in Texas that were previously held for sale, partially offset by
- Alaska production tax credit recoveries of $9 million after tax, or $0.06 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 recently 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 by June 1, 2013, subject to governmental and third-party approvals.
Under the agreement, Sinochem will acquire 82,800 net acres of leasehold held by Pioneer in the Wolfcamp horizon. Pioneer retains 60% of its interest in the Wolfcamp depths 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.
Pioneer successfully drilled and completed 39 horizontal wells in the Wolfcamp Shale joint interest area during 2012, of which 26 wells were placed on production. Of the 26 wells on production, 22 wells were completed in the B interval and 4 wells were completed in the A interval. Pioneer’s net horizontal Wolfcamp Shale production in the joint interest area averaged 2 MBOEPD in 2012, with a year-end exit rate of 5 MBOEPD.
The thickness of the Wolfcamp B interval in the southern joint interest area provides the opportunity to complete two stacked laterals in the interval (referred to as Upper B interval and Lower B interval). The Company placed its first Lower B interval well on production in the fourth quarter, which had an initial 24-hour peak flow rate of 696 BOEPD. A Wolfcamp A interval well was also placed on production in the fourth quarter with initial 24-hour peak flow rate of 442 BOEPD. Both wells had an oil content of approximately 80% and continue to produce above the 575 thousand barrel oil equivalent (MBOE) average estimated ultimate recovery (EUR) type curve for horizontal Wolfcamp Shale wells in the southern joint interest area.
Pioneer also placed its first horizontal Wolfcamp Shale well with a 10,000-foot lateral on production during January 2013. It had an initial peak 24-hour production rate of 1,203 BOEPD and an average peak 20-day flow rate of 1,022 BOEPD. The oil content of this well is approximately 80%. The performance of this well is substantially above 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.
Pioneer expects to run 7 rigs in the southern joint interest area during 2013, with an increase of 3 rigs per year expected in 2014 and 2015. The 2013 drilling program will continue to focus on delineating acreage and testing the Wolfcamp A, Upper B, Lower B and D intervals, while the program in 2014 and beyond will primarily focus on development drilling and accelerating production growth. Approximately 50% of the wells drilled in this area during 2013 will be from pads, increasing to approximately 75% in 2014. The Company has included $20 million in the 2013 southern joint interest area drilling budget for coring, open-hole logging, micro-seismic and 3-D seismic (“science”). The cost for drilling development wells is targeted at $7.5 million to $8.0 million for a 7,800-foot lateral well. The Company expects to continue testing laterals as long as 10,000 feet at an additional cost of approximately $1.5 million. Completion techniques will continue to be optimized and downspacing opportunities will be evaluated. In particular, slickwater fracture stimulations will be tested, which could save approximately $1.0 million per well when compared to gel-conveyed fracture stimulations.
During the fourth quarter of 2012, Pioneer completed two highly successful horizontal Jo Mill wells. 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 approximately 80% oil content, and when normalized to 5,000 feet, the wells have outperformed the 650 MBOE EUR type curve since being placed on production.
Pioneer’s extensive Midland Basin geologic analysis, based upon data from thousands of wells, has identified multiple prospective horizontal targets with substantial oil in place throughout the Company’s northern Wolfcamp/Spraberry acreage position of more than 600,000 gross acres. These horizontal targets include the Jo Mill interval and the Wolfcamp and Spraberry Shales. Prospectivity is defined by several geologic properties, including original oil in place, kerogen content, thermal maturity, porosity and brittle mineral fraction (increased fracability due to reduced clay content). The depth of the targets is also important as reservoir pressure increases with depth. Pioneer’s northern Wolfcamp/Spraberry acreage is located in the deepest part of the Midland Basin, which should make this area very prospective for horizontal targets.
The Company is currently operating one horizontal rig focused on delineating its northern acreage position. The rig recently drilled the Company’s first two horizontal Wolfcamp Shale wells in Midland County. The first well (DL Hutt C #1H) was completed in the Wolfcamp B interval and had a lateral length of 7,380 feet. It had an initial peak 24-hour production rate of 1,693 BOEPD and an average peak 20-day rate flowing naturally of 1,510 BOEPD. The oil content of this well is approximately 75%. The performance of this well is substantially above the 650 MBOE EUR type curve.
The second well in Midland County is scheduled to be completed in the Wolfcamp A interval later in February. The rig is now drilling the first of two horizontal Wolfcamp Shale delineation wells targeting the B interval in Martin County.
To accelerate the delineation and appraisal of the northern Wolfcamp/Spraberry acreage, the Company is initiating a $1 billion capital program over the next two years to confirm the estimated 3.0 BBOE of resource potential that the Company believes exists in its northern acreage, which has the potential to add substantial net asset value. The 2013 drilling program, which is expected to cost $400 million, is scheduled to ramp up to four rigs early in the second quarter and 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 equates 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 Shale and the Lower Spraberry Shale. The drilling cost for these wells is expected to range from $7.5 million per well to $8.5 million per well assuming 7,000-foot laterals. This cost excludes $80 million of estimated “science” and infrastructure costs. The 2013 horizontal drilling program is expected to deliver a year-end exit rate for horizontal production from the northern acreage ranging from 5 MBOEPD to 7 MBOEPD.
Pioneer expects to increase the rig count on its northern Wolfcamp/Spraberry acreage to 6 rigs to 8 rigs in 2014 and invest another $600 million to fund the remainder of the two-year appraisal program. The 2014 program may also include testing horizontal drilling in deeper intervals below the Wolfcamp Shale.
Pioneer reduced its vertical drilling program in the Spraberry field from 40 rigs in the first quarter of 2012 to 20 rigs at the end of the year as horizontal drilling activity increased. The Company drilled 132 vertical wells in the fourth quarter and 631 wells over the entire year. Over the second half of 2012, the number of vertical wells awaiting completion increased by 57 wells as the Company shifted its expenditures to more horizontal drilling.