Pioneer will be pure-play Permian by end of year

Pioneer Natural Resources (ticker: PXD) reported second quarter results today, showing net income of $66 million, or $0.38 per share. After adjusting for derivative losses and other special charges, Pioneer earned an adjusted $243 million in Q2 2018.

The company produced 280 MBOEPD from the Permian in Q2, 328 MBOEPD company-wide. Permian production is up 7% sequentially, 32% year-over-year. This growth is expected to slow somewhat in the next quarter, as Pioneer predicts it will produce roughly 283 MBOEPD.

The company intends to sell all non-Permian assets, and is steadily divesting its non-core properties. Pioneer still holds a significant Eagle Ford position, which could be valued at $1.3 billion based on recent deals, and also owns properties in South Texas. The company recently sold its West Panhandle field for $201 million, and expects to be a pure-play Permian operator by the end of the year.

Most production receives Brent-related pricing

While Pioneer estimates over 85% of the company’s Permian oil production is covered by derivatives, this does not necessarily mean the company will receive WTI pricing on that 85%. Pioneer received an average of $61.20/bbl in Q2. This is an improvement over the average Midland price of $59.90, but falls short of the average WTI price of $67.91. However, the company continues to secure marketing options for its production, minimizing its exposure to the Midland-WTI differential.

Pioneer now has over 90% of forecasted production under firm transportation contracts through early 2021. Oil under these contracts receives Brent-related pricing. Pioneer added to this in Q2, and starting in September all remaining oil will receive WTI Cushing pricing. Pioneer will have no exposure to Midland crude pricing through 2020.

Adding four rigs in second half of 2018

Overall, Pioneer has no intention of slowing down in the Permian and expects to add four more rigs in the second half of the year. This would give the company a 24-rig drilling program, one of the largest in the basin. Many of the company’s upcoming wells will utilize a new completion design, what Pioneer calls “Version 3.0+”. This design has outperformed earlier designs in all major areas, producing well beyond offset wells.

Q&A from PXD conference call

Q: So on the additional 4 rigs as you mentioned, Tim, it doesn’t change the previous number of wells that you’re looking to POP. So as we think about the significant number of DUCs that kind of buildup, how should we think about cadence of those DUCs being worked down in 2019?

Timothy L. Dove: Well, I think we will, of course, as we’re starting this up in August and our typical spud-to-POP timing is going to, be, say 150, 170 days on a three-well pad, you can see that we’re talking five months. So we really won’t even be completing wells until probably January from the additional rigs. And so what it’ll do is it’ll affect the cadence of 2019 POPs basically or DUCs. The DUCs, we’ll start to reduce that count of DUCs starting early next year.

Q: And then obviously, you all have done a phenomenal job on the marketing side and getting so much of your crude to the Gulf Coast. I’m just curious, how much – what percentage of you all’s exports right now goes to China?

Timothy L. Dove: Rich, you want to comment on that?

Richard P. Dealy: Yeah, we probably have only had a couple sales this year to China and none recently, and so I think as all these oils are fungible and they move around, and so I think China’s reduced their takes out of the U.S. And those barrels have now just gone to the place where China was getting them. So I think it just is one of those things that it’s a global market and the barrels will move around to find the home where they need to be but the demand is still there.

Q: Can you talk a bit more about the Spraberry and Jo Mill appraisal programs, specifically what your hypothesis is in terms of development strategy and spacing? And we wonder a little because with Lower Spraberry wells achieving some of the greatest uplift from your Version 3.0 completions, how would you expect well performance to change if at all in a development mode situation and optimal spacing?

J.D. Hall: Really that’s why you see us progressing the Spraberry testing. Of course, we’ve done a lot of drilling in the Lower Spraberry Shale but not nearly as much in the Jo Mill and the Middle Spraberry. We just put the first test online. We’re deploying our new and larger completions, and going forward, I would see us start to increase the amount of wells that we do in each one of these areas, because they’re a significant part of our 1 million in 10 initiative, so we have very high expectations.

We know the Lower Spraberry Shale much better than we do the Jo Mill and the Middle Spraberry, but everything that we do and everything we see from our competitors around us leaves us incredibly optimistic. So looking forward to the results and you’ll hear a lot more about particularly the Jo Mill and the Middle Spraberry next quarter.

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