Completion Evolution Improving Capital Intensity for Pioneer Natural Resources: KLR

Pioneer Natural Resources  (PXD) Completion Evolution Improving Capital Intensity 

KLR is increasing its target price $3 to $168 per share due to a ~2.5% decrease in capital intensity and lower operating expense partly offset by lower liquids price realizations. Early this year, given weak commodity prices, Pioneer reduced northern Spraberry field activity to 12 rigs and deferred Eagle Ford drilling. The company expects to pause southern Spraberry JV development by mid-year.

Consistent with management’s intent to scale Spraberry field development in a NYMEX $50+ oil price environment, our economic model contemplates increasing northern Spraberry activity late this year. Structurally, we expect Pioneer to increase company-wide development activity by seven to nine rigs per annum through ’20.

Superior capital yield (cash recycle ratio)

As a consequence of ~10% lower capital intensity and ~20% higher cash margin, Pioneer’s mid-cycle (’18) capital yield is ~160% versus the industry median cash recycle ratio of ~130%. Our ’16 production growth expectation of approximately 13% is in line with company guidance (12%+).

Spraberry field completion optimization increasing economic yield

The company’s completion optimization entails greater frac density (~150’ per lateral frac stage), proppant concentration (~1,400 lbs per lateral foot) and has migrated toward finer sand sizes (70-100 mesh) to mitigate the need for high gel concentration carrying fluids. Pioneer plans to test ~100’ frac spacing and ~1,700 lbs/ft. of proppant on approximately 80 wells this year for an incremental cost of $0.5-$1 million per well.

In the northern Spraberry, Wolfcamp B wells (~8,200’ laterals) utilizing optimized completions have produced ~220 Mboe the first 290 days and should recover 1,100+ Mboe (~70% oil) for a cost of ~$7.5 million (~40% IRR). Wolfcamp A wells (~9,100’ laterals) have produced ~180 Mboe the first 240 days and should recover 1,000+ Mboe (~70% oil) for a cost of ~$8 million (~30% IRR). Lower Spraberry wells (~9,200’ laterals) have produced ~190 Mboe the first 250 days and should recover approximately 1,000 Mboe (~75% oil) for a cost of ~$8 million (~30% IRR).

In the southern Spraberry JV, Wolfcamp B wells (~8,500’ laterals) utilizing optimized completions have produced ~150 Mboe (~65% oil) the first 180 days and should recover 1,000+ Mboe for a cost of ~$7.5 million (~30% IRR).

John Gerdes, KLR Group