Energy Prospectus

Press release after the market closed on February:

Pioneer Natural Resources Company (PXD) (“Pioneer” or “the Company”) today reported financial and operating results for the quarter ended December 31, 2017, and announced the Company’s capital program for 2018.

Pioneer reported fourth quarter net income attributable to common stockholders of $665 million, or $3.87 per diluted share. Without the effect of noncash mark-to-market (MTM) derivative losses of $169 million after tax, or $0.99 per diluted share, and a noncash benefit related to the reduction in Pioneer’s deferred tax liability resulting from the Tax Cuts and Jobs Act of $625 million, or $3.64 per diluted share, adjusted income for the fourth quarter was $209 million after tax, or $1.22 per diluted share. < This compares to my forecast of $139 million net income after tax.

Fourth quarter, full-year 2017 and other recent production and financial highlights included:

producing 305 thousand barrels oil equivalent per day (MBOEPD) in the fourth quarter, an increase of 29 MBOEPD, or 11%, compared to the third quarter of 2017; fourth quarter production was above the top end of Pioneer’s production guidance range of 292 MBOEPD to 302 MBOEPD; fourth quarter oil production was up 18 thousand barrels oil per day (MBOPD), or 11%, compared to the third quarter of 2017;
producing 272 MBOEPD in 2017, an increase of 38 MBOEPD, or 16%, compared to 2016; oil production was up by 25 MBOPD, or 19%, compared to 2016; the 2017 production growth was driven by the Company’s Permian Basin horizontal drilling program, with total Permian Basin oil production for 2017 increasing by 26% compared to 2016;
reducing 2017 production costs per barrel oil equivalent (BOE) (excluding taxes) by 12% compared to 2016; production costs in 2017 benefited from the Company’s cost reduction initiatives and growing low-cost Permian Basin horizontal production;
delivering 309% drillbit reserve replacement in 2017 by adding proved reserves of 314 million barrels oil equivalent (MMBOE) from discoveries, extensions and technical revisions of previous estimates at a drillbit finding and development cost of $8.46 per BOE (excludes positive price revisions of 52 MMBOE, proved reserves divested of 7 MMBOE and proved reserves acquired of 1 MMBOE);
continuing to maintain a strong balance sheet with cash on hand at the end of the fourth quarter of $2.2 billion (includes liquid investments); year-end net debt to 2017 operating cash flow was 0.3 times and year-end net debt-to-book capitalization was 5%;
placing 64 horizontal wells on production in the Permian Basin during the fourth quarter, of which eight wells had higher intensity completions (referred to as Version 3.0+ completions) compared to Version 3.0 completions; the Company has now placed 20 wells on production with higher intensity completions that continue to significantly outperform Version 3.0 completions;
placing the Company’s first Wolfcamp D interval well with a Version 3.0 completion on production during the fourth quarter in Midland County; the well delivered an initial peak 24-hour production rate of 3.6 MBOEPD and has delivered 45-day cumulative production of 120 thousand barrels oil equivalent (MBOE), with an oil content of 72%;
completing acreage trades during 2017 for 7.2 million lateral feet in the Permian Basin;
drilling and completing 11 new wells and completing nine previously drilled-but-uncompleted (DUC) wells in the Eagle Ford Shale during 2017 (Pioneer has a 46% working interest); to date, average cumulative production per well from the new drills and DUCs with higher intensity completions has been more than double the average cumulative production per well from all wells placed on production in 2015 and 2016; and
exporting approximately 90 MBOPD of Permian Basin oil production during the fourth quarter to customers principally located in Asia and Europe; premiums on Gulf Coast refinery and export sales added $15 million of incremental cash flow in the fourth quarter; the Company expects to export a similar amount of oil during the first quarter of 2018.
Pioneer’s 2018 Plan and Capital Program is summarized below:

planning to divest the Company’s Eagle Ford Shale, South Texas, Raton and West Panhandle assets during 2018, making Pioneer a Permian Basin “pure play”; data rooms are expected to open later in the first quarter for the assets being divested; after the divestitures are completed, the Company expects reported revenue per BOE will increase and operating expense per BOE will decrease, thereby significantly improving reported cash operating margins and corporate returns;
planning to operate 20 horizontal rigs in the Permian Basin during 2018; 16 rigs are currently operating in the northern portion of the play, with two rigs focused on increasing the DUC inventory to improve operational flexibility; once an adequate DUC inventory is built, the two rigs will focus on production growth with incremental production volumes not expected until early 2019 as a result of pad drilling; four rigs will continue to operate in the southern Wolfcamp joint venture area, with activity focused in the northern portion of this area (Pioneer has a 60% working interest);
expecting to place 250 to 275 wells on production in the Permian Basin during 2018; approximately 45 of these wells will be Version 3.0+ completions in the first half of 2018; the remaining wells for 2018 are currently planned to be predominantly Version 3.0 completions; Pioneer’s 2018 production forecast reflects this completion mix;
reducing the use of four-string casing designs in the 2018 Permian Basin drilling program to approximately 50% compared to 75% in the second half of 2017;
forecasting Permian Basin oil production growth in 2018 ranging from 19% to 24% compared to 2017; total Permian Basin production, on a BOE basis, is also forecasted to grow by 19% to 24% compared to 2017;
expecting internal rates of return (IRRs) averaging 65% for the 2018 drilling program (including facility investments) assuming an oil price of $55.00 per barrel and a gas price of $3.00 per thousand cubic feet (MCF);
planning capital expenditures for 2018 of $2.9 billion, which includes $2.65 billion for drilling and completion activities and $260 million for water infrastructure, vertical integration, field facilities and vehicles; this capital program assumes that further efficiency gains will offset the Company’s estimated cost inflation of 5%; Pioneer’s vertical integration operations mitigate the impact of the 10% to 15% cost inflation forecasted for the industry in 2018;
funding the 2018 capital program from forecasted cash flow of $2.8 billion (assumes prices of $55 per barrel for oil and $3 per MCF for gas), proceeds from asset divestitures and cash on hand; the 2018 capital program is expected to be cash flow breakeven at approximately a $58 per barrel oil price; at current strip prices of $61.00 per barrel for oil and $2.85 per MCF for gas, forecasted cash flow would be $3.0 billion;
maintaining derivative positions that cover more than 85% of forecasted 2018 Permian Basin oil production and more than 60% of forecasted 2018 Permian Basin gas production;
enhancing cash flow with premiums on growing sales to the Gulf Coast refinery and export markets;
expecting to repay the May 2018 debt maturity of $450 million from cash on hand;
forecasting 2018 year-end net debt to 2018 operating cash flow to be below 0.5x;
increasing the Company’s semiannual per share dividend from $0.04 to $0.16 (equivalent to $0.32 per share on an annualized basis); reflects the Company’s strong balance sheet, expected proceeds from asset divestitures and positive outlook for generating free cash flow; the Company also plans a common stock repurchase program during 2018 to offset the impact of dilution associated with employee stock compensation awards; and
expecting to include return and per-share growth goals in the Company’s 2018 executive compensation program.
President and CEO Timothy L. Dove stated, “The Company delivered another excellent quarter, with strong earnings, solid execution, robust oil production growth, excellent horizontal well performance in the Permian Basin and reduced production costs. Our world-class Permian Basin asset is considered by many to be the top oil shale play in North America. We are drilling low-cost, highly productive wells that generate high rates of return as a result of a low all-in cost structure of approximately $19 per barrel.”

“We are in year two of our 10-year plan and remain committed to achieving oil production greater than 700 MBOPD and total production greater than 1 million barrels oil equivalent per day in 2026. By steadily increasing the pace of drilling our low-cost, high-return Permian Basin horizontal wells through 2026, we expect to deliver robust cash flow growth that will self-fund our capital program, improve our return on capital employed (ROCE)1 and generate free cash flow. It will also allow us to continue to return cash to our stakeholders as demonstrated by the dividend increase and share repurchase program we announced today and planned debt repayment in May 2018.”

“In 2018, our capital program is expected to be funded by cash flow if oil prices average approximately $58 per barrel. Looking forward, the breakeven oil price to fund our planned capital program declines to approximately $50 per barrel in 2020 and $40 per barrel in 2026. At an oil price of $55 per barrel and a gas price of $3 per MCF, cash flow is expected to grow by approximately 20% annually and be more than $11 billion in 2026, and our ROCE is forecasted to increase from approximately 5% in 2018 to 15% in 2026.”

There is some good news in this for those of you that own HCLP.

Permian Basin Operations Update and Outlook

Pioneer is the largest acreage holder in the Midland Basin, with approximately 550,000 gross acres in the northern portion of the play and approximately 200,000 gross acres in the southern Wolfcamp joint venture area. Pioneer’s contiguous acreage position and substantial resource potential allow for decades of drilling horizontal wells with lateral lengths ranging from 7,500 feet to 14,000 feet.

The Company implemented a completion optimization program during 2015 in the Spraberry/Wolfcamp that combines longer laterals with optimized stage lengths, clusters per stage, fluid volumes and proppant concentrations. The objective of the program was to improve well productivity by allowing more rock to be contacted closer to the horizontal wellbore. In 2013 and 2014, the Company’s initial fracture stimulation design (Version 1.0) consisted of proppant concentrations of approximately 1,000 pounds per foot, fluid concentrations of 30 barrels per foot, cluster spacing of 60 feet and stage spacing of 240 feet. Beginning in mid-2015, the Company enhanced its fracture stimulation design (Version 2.0), which consisted of larger proppant concentrations of approximately 1,400 pounds per foot, larger fluid concentrations of 36 barrels per foot, tighter cluster spacing of 30 feet and shorter stage spacing of 150 feet. Beginning in the first quarter of 2016, Pioneer commenced testing further-enhanced completion designs (Version 3.0), which included larger proppant concentrations of approximately 2,000 pounds per foot, larger fluid concentrations up to 50 barrels per foot, tighter cluster spacing down to 15 feet and shorter stage spacing down to 100 feet.

The Company placed 56 Version 3.0 wells on production during the fourth quarter of 2017. On average, these wells and the more than 260 Version 3.0 wells that were placed on production prior to the fourth quarter are continuing to outperform Version 2.0 completions.

Pioneer placed 12 wells on production during the second quarter of 2017 that utilized higher intensity completions compared to Version 3.0 wells. These are referred to as Version 3.0+ completions. Eight additional wells using Version 3.0+ completions were placed on production in the fourth quarter. All of these wells utilized increased proppant, and three wells utilized increased proppant and water compared to Version 3.0 wells. Of the eight wells, five were placed on production toward the end of the fourth quarter and are still flowing back. Early production results from the remaining three wells that were placed on production earlier in the quarter are significantly outperforming production from nearby offset wells with less intense completions. Based on the initial success of the higher intensity completions to date, the Company plans to test approximately 45 additional Version 3.0+ completions during the first half of 2018.

Two of the Version 3.0 wells that were placed on production during the fourth quarter were in the Jo Mill interval. Fifteen wells have now been tested as part of the Jo Mill appraisal program since the third quarter of 2014. Performance from all of these wells is encouraging. The Jo Mill wells placed on production to date cover a large cross section of Pioneer’s acreage. The Company plans to drill seven additional Jo Mill appraisal wells during 2018.

Pioneer placed its first Wolfcamp D well with a Version 3.0 completion on production in Midland County during the fourth quarter. The well, which had a lateral length of ~9,700 feet, had an initial 24-hour peak production rate of 3.6 MBOEPD and has delivered 45-day cumulative production of 120 MBOE, with an oil content of 72%. This well delivered the strongest 45-day cumulative production for all Pioneer Wolfcamp D wells to date and ranks as one of Pioneer’s top producing Wolfcamp wells during its early production days.

Pioneer’s 2018 drilling program includes appraising: (i) its first Clearfork horizontal well (located in Midland County), (ii) 10 wells in the Jo Mill and Middle Spraberry intervals in conjunction with nine Lower Spraberry Shale wells to determine an optimal development strategy for the Spraberry formation (these appraisals will test different spacing, staggering, sequencing, and completion design) and (iii) three Wolfcamp D interval wells.

For the fourth quarter of 2017, Pioneer placed 64 horizontal wells on production. Forty-three wells were in the northern area and 21 wells were in the southern Wolfcamp joint venture area. For the full year, 224 wells were placed on production, of which 184 were in the northern area and 40 wells were in the southern Wolfcamp joint venture area.

The Company’s Permian Basin horizontal drilling program continues to drive production growth, with total Permian Basin oil production increasing by 14 MBOPD, or 9%, in the fourth quarter of 2017 compared to the third quarter of 2017. Total Permian Basin oil production increased by 26% in 2017 compared to 2016. Pioneer’s forecasted 2018 oil production growth rate for the Permian Basin ranges from 19% to 24%.

The Company plans to operate 20 horizontal drilling rigs in the Permian Basin during 2018. Sixteen rigs are currently operating in the northern part of Pioneer’s acreage, with two rigs focused on increasing the DUC inventory to improve operational flexibility. Once an adequate DUC inventory is built, the two rigs will focus on production growth with incremental production volumes not expected until early 2019 as a result of pad drilling. Four rigs will continue to operate in the southern Wolfcamp joint venture area, with activity focused in the northern portion of this area (Pioneer has a 60% working interest). Pioneer expects to place 250 to 275 gross wells on production in the Permian Basin during 2018. Of these wells, approximately 200 to 225 wells will be in the northern area and 50 wells will be in the southern Wolfcamp joint venture area. Approximately 60% of the wells will be in the Wolfcamp B interval and 25% in the Wolfcamp A interval. The remaining 15% will be a combination of wells in the Spraberry Shale intervals (Jo Mill, Lower Spraberry and Middle Spraberry) and a limited appraisal program for the Clearfork and Wolfcamp D intervals.

The budgeted costs to drill and complete these wells in 2018 are: Wolfcamp B – $8.9 million for a 10,000-foot lateral well; Wolfcamp A – $8.3 million for a 9,500-foot lateral well; and Spraberry intervals – $7.5 million for a 9,500-foot lateral well. For the 2018 drilling program, the expected ultimate recoveries (EURs) by interval are: Wolfcamp B – 1.7 MMBOE, Wolfcamp A – 1.4 MMBOE and the Spraberry intervals – 1.1 MMBOE.

Production costs (including production and ad valorem taxes) for Pioneer’s horizontal Permian Basin wells are expected to continue to range from $4.00 per BOE to $5.00 per BOE.

The drilling program in the Permian Basin is expected to deliver IRRs averaging 65%, assuming an oil price of $55.00 per barrel and a gas price of $3.00 per MCF. These returns include facilities costs.

Permian Basin Infrastructure

Pioneer is focused on optimizing the development of the Permian Basin, which includes ensuring that future infrastructure requirements are constructed. These requirements include construction of large-scale horizontal tank batteries, saltwater disposal facilities and below-grade cellars. They also include construction of additional field and gas processing facilities, the build-out of a field-wide water distribution system and the development of optimal sand sourcing and logistics.

Forecasted spending for the construction of tank batteries, saltwater disposal facilities and below-grade cellars reflects a combination of building new facilities and expanding existing facilities. The Company expects to spend approximately $300 million in 2018 for these facilities. Approximately 65% of the long-term tank battery requirements is forecasted to be completed at year-end 2018. The Company is utilizing below-grade cellars for 24-well pads to minimize future surface acreage requirements and thereby reduce full-cycle surface costs per well.

Pioneer owns a 27% interest in Targa Resources’ West Texas gas processing system and a 30% interest in WTG’s Sale Ranch gas processing system. These investments (i) improve Pioneer’s contract terms for field gas processing, (ii) ensure the timely connection of Pioneer’s new horizontal wells and (iii) provide the Company with opportunities to benefit from third-party processing revenues. During 2018, the Company expects to spend $170 million for (i) two new plants planned for completion during the first and third quarters of this year (each will have a capacity of 200 million cubic feet per day (MMCFPD)), (ii) two new plants that are expected to be completed in the first and third quarters of 2019 (each is expected to have a capacity of 250 MMCFPD) and (iii) gathering system compression and new connections. The new plants are needed to meet Pioneer’s and the industry’s gas production growth expectations.

The Company is constructing a field-wide water distribution system to reduce the cost of water for drilling and completion activities and to ensure that adequate supplies of non-potable water are available for use in the development of Pioneer’s acreage. The 2018 capital program includes $135 million for the Midland wastewater treatment plant upgrade and additional subsystems, frac ponds and produced water reuse.

Pioneer has signed a contract for its initial offtake of sand sourced in West Texas. Additional contracts are being negotiated. As a result, expansion of the Company’s sand mine at Brady, Texas has been deferred.

https://www.dallasnews.com/business/ene ... gas-assets

I have updated my forecast model for PXD and it will be posted to the EPG website this afternoon.

My valuation increases $9.00/share to $215.00, which compares to First Call's price target of $208.10. My valuation assumes that PXD's realized oil price in 2018, including regional differences and hedge settlements, will be $55.00/bbl in 2018. This compares to their realized oil price of $52.81/bbl in Q4 2017.

A few things to note in the PXD press release:
> The company's realized NGL price in Q4 was more than $2.00/bbl higher than what I had used in my forecast. Higher NGL prices will benefit all of the Sweet 16.
> PXD booked a $598 million decrease in their deferred tax liability, thanks to the GOP Tax Plan. This will also help most of the Sweet 16.
> PXD is going to use a lot more sand to complete their wells going forward. Great news for the frac sand companies.
> PXD plans to sell all of its assets outside of the Permian Basin. These sales will impact my forecast model, but not until they announce actual sales. The sales will probably increase my valuation of the stock because sales proceeds will shore up an already strong balance sheet. Read the article at the link above.
> PXD increased their dividend. It is still quite small, but some hedge funds will only buy stocks that pay dividends.
> The share repurchase program should keep the diluted share count flat going forward.