Pioneer Natural Resources Company (ticker: PXD) is a large independent oil and gas exploration and production company, headquartered in Dallas, Texas, with operations in the United States. Pioneer is one of the most active drillers in Texas’ Spraberry/Wolfcamp oil field in the Permian Basin and the Eagle Ford Shale play in South Texas. Its natural gas operations focus on the Rockies and Mid-Continent regions with assets in the coal bed methane-rich Raton Basin as well as in the Hugoton and Texas Panhandle gas fields.
On October 25, 2013, Pioneer Natural Resources announced the sale of its subsidiary, Pioneer Natural Resources Alaska, Inc., to Caelus Energy Alaska LLC (Caelus) for cash proceeds of $550 million. Caelus acquires 100% equity of the subsidiary, and the transaction has an effective date of October 1, 2013. Net production from Alaskan operations averaged 4 MBOEPD over the first nine months of 2013, with 44 MMBOE of proved reserves. Caelus, like PXD, is also based in Dallas and was founded in January 2011 by James C. Musselman. Prior to being the President and CEO of Caelus, Musselman held the same title at Triton Energy. The company was sold for Hess Corporation in 2001 for $3.2 billion.
The sale of Pioneer’s Alaska subsidiary is expected to result in a noncash loss of approximately $350 million which will be recorded in the fourth quarter of 2013. The financial and operating results related to Pioneer’s Alaska activities will be reflected as discontinued operations for the quarter ending December 31, 2013, and for all prior periods that will be presented in the Company’s December 31, 2013 Form 10-K.
Scott D. Sheffield, Chairman and CEO OF Pioneer Natural Resources, said: “The sale of our Alaska asset will allow us to strategically redeploy capital to our core, oil-related Spraberry/Wolfcamp asset. We are currently delineating multiple prospective horizontal targets (Wolfcamp, Jo Mill and Spraberry shales) across more than 600,000 gross acres in the northern part of this asset. The current drilling program for the northern Spraberry/Wolfcamp calls for an increase from five horizontal rigs during the second half of 2013 to eight horizontal rigs in 2014. With the redeployment of capital from the Alaska asset sale to the northern Spraberry/Wolfcamp, we plan to increase the horizontal rig count to ten rigs in 2014 and will ramp up this rig count faster than originally anticipated thereafter.”
According to PXD’s most recent investor presentation on October 17, 2013, the company spent $1.225 billion ($400 million on drilling) out of its $3 billion capital program on Spraberry/Wolfcamp development in 2012. The rig count of 12 in 2013 is projected to rise to 50 by 2018. Four rigs were added in Q2’13 alone. As many as 40 wells are planned to be spud on six different intervals in the region by year-end 2013. PXD confirms the interval targets holds as much as 3 billion BOE, while the entire play holds up to 50 billion BOE
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Pioneer Natural Resources following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Bank of America Merrill Lynch Global Commentary Note – October 25, 2013
$550m cash sale for 4,000 boepd. $550mm for the sale of its 4,000 bpd (100% oil) asset in Alaska is a small but significant final step in the multi-year clean-up of Pioneer’s portfolio that now sits as a Texas pure play. The sale price compares with carried book value of ~$900mm, which had likely set street expectations; however on any measure of value as $ per flowing barrel, or $ per barrel of proven reserves we believe PXD realized a solid price for an asset that has had inconsistent performance as regards resource upside. Critically, sale proceeds can fund acceleration in drilling activity across its core Permian Wolfcamp region, which by our preliminary estimates has associated value of ~$4/sh, based on our assumed 750 mmboe type curve in the Wolfcamp ‘B’.
4.6x DACF / $137,500 per flowing barrel / $12.70 / bbl. Based on management’s reserves disclosure, as audited by Ryder Scott, proven reserves at year end stood at ~44mm boe for an implied reserve life of >30 years!! However this was the plight of legacy Pioneer where very long life reserve bookings lacked significant value. PXD has had some success with offshore exploration; but realizing upside required greater focus than could be justified by the relative value opportunity in the Permian. In 2013 we estimate Alaska would generate ~$150mm of cash flow versus planned spending of ~$190mm. Management expects to incur a non cash impairment of ~$350mm – essentially the difference between the $550mm sale price and book value; note that Pioneer had Net Operating Losses of ~$500mm at year end, so that we do not anticipate any tax leakage from the sale.
Accelerating development in the Permian. Capex associated with Alaska alone could fund a 2 rig program in the Permian; alternatively the cash proceeds from the sale could reasonably accelerate a 70 well program, which on a preliminary basis we estimate would have associated NAV of ~$4 / sh. With this backdrop, management is accelerating development in the Permian: from ~5 rigs currently operating in the Northern / Spraberry, PXD will step up to 8 in 2H13, and further to 10 in 2014. Notably management stated that it ‘will ramp up this rig count faster than originally anticipated thereafter’.
Awaiting the type curve. Over the past few weeks we increased our PO on Pioneer to $275 on the assertion that a series of recent 3rd party wells results coupled with a technical review of the Wolfcamp with management pointed to unrealistically low assumptions by management for the resource potential in the play., Critically, with a higher EUR (we assume 750,000 versus management’s guidance of 500,000 boe) we believe current production guidance of a 13% – 18% cagr through 2017 is too low. With our revised base case a 22% cagr through 2017, we believe the growth outlook can support a move to ~$275 / share; however depending on what scenarios are laid out for development and derisking of multiple additional formations in the Permian (Wolfcamp A, Jo Mill, lower / middle Spraberry), we believe risks to Pioneer’s embedded NAV are skewed higher still. We continue to view Pioneer as a core energy holding, and a US1 list stock within BofA Merrill Lynch.
Wells Fargo Securities Note on October 25, 2013
Selling Alaska Assets for $550MM, Increasing 2014 Permian Rig Count. PXD announced it is selling its Alaska assets to Caelus Energy for $550MM, versus the $1 billion we had included in our NAV estimate for the asset. Despite the lower value than we had modeled, the transaction makes a lot of sense in our view as proceeds will be to accelerate in PXD’s core area in Northern Wolfcamp/Spraberry. Given the company’s ~30B market cap, Alaska was simply not a needle mover for the company, as PXD is quickly becoming a Permian pureplay and as such we had believed that the Alaska assets were a logical candidate for a sale. Proceeds nearly plug the capex outspend in 2014 according to our model. Net production from Alaska averaged 4 Mboe/d over first 9 months of 2013, and proved reserves stood at 44 MMBoe as of year-end 2012. With capital from sale redeployed to the Permian, PXD now expects to operate 10 rigs in the play in 2014, up from prior plans of 8 rigs.
UBS Investment Research Note on October 25, 2013
Solid sales price for Alaska assets. PXD has agreed to sell its Alaska business to Caelus Energy for $550 million in cash, and the deal is expected to close by YE13. Based on peer average valuations of ~$70,850/Boed and $17.65/Boe (proved), we had an estimated value range of $300-$800 million. The Alaska assets had YE12 proved reserves of 44 MMBoe and averaged 4 MBoed YTD. Management expects the deal will be highly tax efficient given its favorable NOL position.
Proceeds to accelerate N. Wolfcamp appraisal/development; raising estimates. We view the Alaska sale as an important transaction for several reasons: 1) proceeds will be directed to the higher-growth, higher-return Northern Wolfcamp, enabling PXD to accelerate its horizontal rig count from 5 rigs in 2H13 to 10 rigs next year (vs. prior plan of 8 rigs in 2014), which may be an early hint that it plans to raise its LT target of 50 rigs in the Wolfcamp; 2) allows PXD to more quickly shift from appraisal mode to development drilling in sweet spots of the play (we raised our NAV by $10 to $271/share); 3) rig count acceleration should position PXD to boost its LT production growth guidance of 13-18% – we raised our 2014-17E growth forecast to ~17% per annum (from 15% per annum prior); 4) increases PXD’s leverage to the Permian . . . and this market likes all things Permian.
Northern Wolfcamp activity to monitor during 3Q results and into 2014. In conjunction with 3Q results, PXD plans to disclose four well results in the A and B intervals in Midland and Martin County, and may also provide initial well results in the Lower Spraberry and Jo Mill intervals in Midland and Martin Counties. Given that its first 3 producing Northern Wolfcamp wells (2 in the B-interval and 1 in the A) are tracking on an 800-1,000 MBoe type curve, we expect PXD to disclose an updated EUR for the play by early 2014, suggesting significant upside to its 3.0 BBoe resource estimate.
Valuation: premium to peers on EV/EBITDX but in line on P/NAV. Our $235 PT (was $220) assumes ~0.85x our revised 2P NAV of $271/share.
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