Pioneer Natural Resources sells Eagle Ford Shale midstream business for $2.15 Billion

Pioneer Natural Resources expects to ramp up drilling rigs to same level as before oil price collapse

Pioneer Natural Resources is selling Eagle Ford Shale Midstream for $2.15 billion, subject to regulatory approvals, to Reliance Holding USA, an existing partner in the business.

Pioneer Natural Resources

Pioneer Natural Resources CEO Scott D. Sheffield.

Pioneer owns 50.1% of EFS Midstream and Reliance owns the remaining 49.9%. The companies announced the deal Monday.

The EFS Midstream business – consisting of 10 central gathering plants and about 460 miles of pipelines – was formed in 2010 to handle condensate and gas produced from wells in the Eagle Ford Shale, according to a Pioneer release. It also stabilizes the condensate, where necessary, and treats the gas.

The sale will enable Pioneer Natural Resources to strategically redeploy capital to its core oil-rich Spraberry/Wolfcamp asset in the Permian Basin, which CEO Scott D. Sheffield says has been transformed from a vertical play into a world-class horizontal play.

“We are currently operating 10 horizontal rigs in the Spraberry/Wolfcamp'” said Sheffield. “Our strong balance sheet, combined with a strong derivatives position for 2015 and 2016, provides us with the financial firepower to ramp up drilling activity on high-return Wolfcamp B and Wolfcamp A horizontal wells during the second half of this year.”

According to Pioneer Natural Resources, data from the wells drilled since early 2013 in the northern Spraberry/Wolfcamp continue to support estimated ultimate recoveries of 1 million barrels of oil equivalent per well, with oil content more than 70 per cent. The company intends to re-initiate horizontal drilling in the Lower Spraberry Shaleinterval where production from wells drilled since early 2013 support EURs ranging from 650 thousand barrels oil equivalent to one million barrels oil equivalent per well with oil content of more than 75 per cent.

“Starting in July, we will add an average of two horizontal rigs per month in the northern Spraberry/Wolfcamp through the remainder of the 2015 as long as the oil price outlook remains positive,” said Sheffield.

This additional drilling activity is expected to increase the company’s 2015 capital budget by approximately $350 million. The addition of these 12 rigs will have minimal impact on forecasted 2015 production growth of 10 per cent-plus due to multi-well pad drilling.”

“During the first quarter of 2016, we are planning to add another eight horizontal rigs, of which six rigs will be in the northern Spraberry/Wolfcamp and two rigs will be in the Eagle Ford Shale,” said Sheffield.

This rig ramp will bring Pioneer’s total horizontal rig count to 36 rigs (28 rigs in the Spraberry/Wolfcamp and eight rigs in the Eagle Ford Shale), which is essentially the same as Pioneer’s horizontal rig count prior to the recent oil price collapse.

Pioneer Natural Resources and Reliance will also benefit from fee reductions under existing downstream processing and transportation contracts with Enterprise in exchange for extending the contract term to 20 years and dedicating additional Eagle Ford Shale volumes to Enterprise.

Reduced fees are expected to benefit Pioneer Natural Resources and Reliance over the original terms of the downstream contracts by approximately $200 million on a net present value basis at 10 per cent. These reduced fees will primarily be reflected as improvements in future realized prices. Enterprise has also agreed to spend$270 million over the next ten years on new facilities, connections and expansions to support the continuing development of the Eagle Ford Shale resource, according to the release.

The purchase price for the EFS Midstream business will be paid by Enterprise in two installments: $1.15 billion at closing, which is expected to occur early in the third quarter of 2015, and $1 billion twelve months after closing. After retiring the debt of EFS Midstream of approximately $150 million, Pioneer’s share of the net sale proceeds, before normal closing adjustments, is expected to be $500 million at closing and $500 million one year later.

The sale of EFS Midstream is expected to result in a pretax gain in excess of $725 million to Pioneer Natural Resources, which is expected to be recognized in the third quarter of 2015. Pioneer expects net cash proceeds from the sale to total approximately $900 million after tax. In addition, Pioneer will realize its $100 million share of the reduced transportation and processing fees associated with the new downstream agreements. The sale of EFS Midstream is also expected to enhance Pioneer’s ability to export processed Eagle Ford Shale condensate.

Upon closing of the transaction, Pioneer Natural Resources will no longer receive its share of the cash flow generated by the EFS Midstream business, which was forecasted to be more than $100 million in 2015. The loss of this cash flow will result in an increase to Pioneer’s Eagle Ford Shale production costs of approximately $3.00 per barrel oil equivalent (BOE) and total corporate production costs of approximately $0.75 per BOE.

 

Posted in: Energy Financial

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