Pioneer’s Strong Results Show America’s Oil Boom Is Just Taking A Breather
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Pioneer Natural Resources is a bellwether company, a Platonic ideal of all that is possible for America’s oil industry. Pioneer has the strongest balance sheet of any of the American independents with $2.5 billion in cash against about $3 billion in debt. It has built up a massive 800,000-acre position in the Permian Basin, a region that has emerged as the single best oil province in America, where the rigs are still running even at these prices.
Finding oil is not the issue for Pioneer, it’s how to get it out of the ground as quickly and efficiently as possible. The company figures it has about 12,000 drilling locations in the Permian, enough for about 90 years of drilling at its current pace. Pioneer’s balance sheet is strong enough and its land is good enough that even as America’s oil industry has flatlined (with U.S. oil output down to 9 million bpd from a high of 9.6 million) Pioneer has managed to keep growing its output, which at 222,000 barrels of oil (and gas equivalent) per day is about 10% higher than a year ago. The company, as I wrote in this late 2014 profile, will be a survivor.
Pioneer reported impressive first quarter earnings yesterday and its stock is up 6% in Tuesday morning action. Sure the company had a big net loss, bringing in just $685 million in revenue against $1.1 billion of expenses. But when you back out that pesky stuff like $350 million in non-cash depreciation expense, Pioneer pretty much broke even. It is still running 12 rigs (down from 30 in 2014), and has gotten its cash costs down to about $14 per BOE.
Drilling into reservoir zones known as the Wolfcamp A and B, Pioneer expects to do about 230 wells this year. It claims to still be making improvements to well design, drilling longer horizontal stretches (or “laterals”) of as much as 13,000 feet and fracking them in more stages with more water (30 barrels per foot) and more sand (1,400 pounds per foot), all with the goal of draining as much oil as possible. Pioneer says that its more complex designs have added costs to its wells, which average $8 million. Yet, all told, Pioneer’s average “cost per perforated lateral foot” has come down 32% since late 2014 and the average well it drills today will recover about 1.25 million barrels over its lifetime.
Naturally, in these lean times Pioneer, like everyone, is drilling its best acreage. But with 800,000 acres, they have some running room. Pioneer CEO Scott Sheffield has been thinking long-term. In recent years Pioneer has been assembling the pieces Pioneer needs to methodically develop that resource — owning and operating its own rigs, while investing billions in in infrastructure to pipe 300,000 bpd of water to its fracking sites. The company says that if prices were to recover to $50 a barrel (from a current $43) they would add 5 to 10 rigs. They wouldn’t be the only company to increase activity at that price. Drillers have squeezed expenses so tight that $50 is looking like the new $75.
Right now the U.S. oil industry is battered and tattered. The wave of bankruptcies and restructuring is underway. Equity holders are getting wiped out; debt is being turned into equity. Freed from the shackles of too much leverage, companies will find that they can generate decent returns at $50 oil.
Analyst Matt Portillo at Tudor, Pickering & Holt notes that Pioneer, at $162 per share, is already fast closing in on the $164/share net asset value that he thinks the company would be worth in a time of $75 oil, so don’t expect the kind of massive gains from this stock that you’d see from a smaller, more leveraged operator. That said, Pioneer, along with the likes of EOG Resources, will lead the pack for years to come. In late 2014 Sheffield told me that he thought Pioneer could grow its output to more than 1 million bpd by 2024, and maintain that level for years. That target has certainly been pushed back, but the oil is still there, waiting.
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