Pioneer Natural Resources: Meeting targets despite Texas Weather

Poor weather, longer than expected facility turnarounds affect Pioneer Natural Resources production

Pioneer Natural Resources says it is on track to meet its 2015 production forecast, despite lower than expected results from the Eagle Ford Shale.

The company issued an operational update Wednesday, noting that production averaged 197 thousand barrels oil equivalent per day (MBOEPD) in the second quarter of 2015, of which 51 per cent was oil production. Pioneer’s production guidance for the quarter was 198 MBOEPD to 203 MBOEPD.

Oil sales averaged 101 thousand barrels per day (MBPD), natural gas liquids (NGLs) sales averaged 37 MBPD and gas sales averaged 356 million cubic feet per day.

Pioneer says it is maintaining its full-year 2015 production growth forecast at 10%+. Although production growth in the Eagle Ford Shale is now forecasted to be nominal in 2015, production from the Spraberry/Wolfcamp is forecasted to grow by 22 per cent to 24 per cent in 2015 compared to the 20%+ previously forecasted. The reduction in the Eagle Ford Shale growth rate is primarily due to the delays in placing wells on production and performance issues during the first half of 2015, while the increase in the Spraberry/Wolfcamp growth rate reflects the continuing strong performance of the horizontal drilling program, especially in Pioneer’s northern acreage.

Analysts on Pioneer Natural Resources

David Deckelbaum of KeyBanc Capital Markets.

David Deckelbaum of KeyBanc Capital Markets notes that flooding conditions in core Eagle Ford areas in Karnes and Dewitt Counties, TX resulted in production that “was -4% below our estimate for the quarter after 9 fewer wells were tied into sales. Compounding issues was under-performance from the 15 wells tied in further west at Wasburn Ranch in La Salle County, where PXD is suspending drilling activity until results are better understood.”

Deckelbaum says that Pioneer Natural Resources is now 78% hedged on 2016E crude volumes and 69% hedged on gas volumes vs. 69%/56% prior. The company also doubled the number of NGL hedges for 2016 and now has about 32% of volumes covered.

KeyBanc valuation: Pioneer Natural Resources currently trades at 12.5x/10.8x 2015E/2016E EBITDAX vs. peers of 9.5x/9x. Shares are now trading at a 55% discount to our $278.50/share RNAV vs. peers of 34%. Our price target of $160 implies 15.8x/13.6x 2015E/2015E EBITDAX.

Keybank risk assessment: 1) lack of success or disappointing results from the Company’s core properties in the Spraberry trend of the Permian Basin and the Eagle Ford Shale; 2) with the significant ramp up in activities, there are execution risks. All of the above risks could impede the stock from reaching our price target.

Sarp Ozkan, Senior Energy Market Analyst, of Denver-based Ponderosa Advisors LLC says that in terms of their Permian presence: Sweet spots of Pioneer acreage in the Permian realize a 10% rate of return at a WTI price slightly below $40/bbl, assuming the natural gas price is $2.75/MMBtu. The same sweet spots at a $50/Bbl and $2.75/MMBtu price scenario would realize a 25% IRR. The rest of their acreage in the Permian requires a WTI price of above $70/Bbl to realize a 10% rate of return at a $2.75/MMBtu gas price.

And in terms of their Eagle Ford presence: Although Pioneer has placed nine fewer wells than expected on production due to weather-related issues in their Eagle Ford acreage, their Eagle Ford acreage continues to be very economic. The WTI breakeven to realize a 10% rate of return in the sweet spots is slightly lower than $35/Bbl, assuming the natural gas price is $2.75/MMBtu. The same acreage at $50/Bbl and $2.75/MMBtu would realize a 45% IRR. Almost all of their Eagle Ford acreage fetches a 10% rate of return at below $55/Bbl.

When asked if there were any risks associated with Pioneer’s aggressive drilling program in the Sprayberry/Wolfcamp, Ozkan said, “As they expand out of their sweet spots, repeatability of the results in terms of productivity and economics may be impacted.”

Operational overview – Pioneer Natural Resources

Strong Spraberry/Wolfcamp production performance in the second quarter (119 MBOEPD) was partially offset by lower-than-expected production in the Eagle Ford Shale (46 MBOEPD), according to the Pioneer Natural Resources release.

The shortfall in the Eagle Ford Shale was primarily due to fewer wells being placed on production during the quarter as a result of weather delays and well performance issues in LaSalle County, an area outside of Pioneer’s core acreage in Karnes and Dewitt counties.

Second quarter production in the West Panhandle field (7 MBOEPD) was also negatively impacted by a longer-than-expected turnaround at the Fain gas processing plant and weather impacts.

Spraberry/Wolfcamp production grew 7 MBOEPD in the second quarter (6%) compared to the first quarter of 2015, driven by the Company’s successful horizontal drilling program in this play.

Fifty-five horizontal wells were placed on production during the second quarter as expected, of which 28 wells were in Pioneer’s extensive Northern Spraberry/Wolfcamp acreage position and 27 wells were in the Southern Wolfcamp joint venture area. The majority of the horizontal wells drilled across Pioneer’s northern acreage position were Wolfcamp B interval wells.

The average production from these wells is tracking estimated ultimate recoveries (EURs) of more than 1 million barrels oil equivalent (MMBOE). Five Lower Spraberry Shale horizontal wells were also placed on production across the northern acreage during the second quarter with average production results tracking EURs of 1 MMBOE.

In the Eagle Ford Shale, Pioneer’s second quarter production was approximately 3 MBOEPD below the company’s forecast for the quarter. Pioneer expected to place 42 wells on production in the Eagle Ford Shale during the second quarter. However, due to record rainfall and flooding in this area during the quarter, only 33 wells were placed on production in Karnes and DeWitt counties where Pioneer has continued to drill some of the most productive wells in the Eagle Ford Shale and has successfully implemented a downspacing and staggering program. The reduced number of wells placed on production impacted second quarter production by approximately 2 MBOEPD.

Pioneer placed 15 Eagle Ford Shale wells on production on the Washburn Ranch lease (approximately nine thousand net acres) in LaSalle County during 2014. Due to a fire in May of 2014 at the central gathering plant for this area, production from these wells was significantly curtailed until year-end 2014. As a result of the fire, the production forecast that was developed for 2015 was based on limited production data and actual production for these 15 wells came in approximately 1 MBOEPD below this forecasted level in the second quarter. The Company has postponed any further drilling in this area until it has a better understanding of well performance to date.

In the West Panhandle area, the Fain gas processing plant had a scheduled one-week turnaround in mid-May that actually lasted approximately four weeks before normal operations were restored. In addition, production was curtailed during part of the quarter as a result of the record rainfall and flooding that occurred across Texas. The result of the extended turnaround and weather impacts was a production loss of approximately 1 MBOEPD for the second quarter.

Second quarter 2015 production by asset in barrels oil equivalent per day (BOEPD):