Pioneer Natural Resources sticks with plan to increase Permian drilling

Internal rates of return are still excellent despite low oil prices, says Pioneer Natural Resources

Pioneer Natural Resources isn’t backing down from its plan to significantly increase drilling in the Permian Basin, despite a drop in the price of oil by 20 per cent in recent weeks.

Pioneer Natural Resources
Photo: Shaun T. Polczer.

“[I]nternal rates of return are most important in this type of price environment,”CEO Scott Sheffield said during a company earnings conference call, according to Platts. Returns for Pioneer Natural Resources wells in its Spraberry/Wolfcamp play at current strip prices in West Texas are 45-60 per cent and “even in a flat $50 [/b] environment, we still get a 30-35 per cent return.”

Pioneer Natural Resources produced 197,000 barrels oil equivalent per day (MBOEPD) in the second quarter, of which 51 per cent was oil. Q2 production reflected strong Spraberry/Wolfcamp production growth driven by a successful horizontal drilling program partially offset by lower-than-expected production in the Eagle Ford Shale and the West Panhandle field.

“Our horizontal drilling program in the Spraberry/Wolfcamp continues to generate strong margins and returns in a weak commodity price environment due to our aggressive pursuit of cost reductions and efficiency gains combined with our highly productive wells,” Sheffield said in a company release.

Pioneer Natural Resources
CEO Scott Sheffield, Pioneer Natural Resources.

Pioneer Natural Resources realized significant service cost reductions and efficiency gains compared to 2014, including a 20 to 25 per cent reduction in drilling and completion costs , a 20 per cent reduction in horizontal tank battery construction costs, and a 17 per cent reduction in lease operating expenses per barrel oil equivalent (BOE).

Management expects to further cost reductions and efficiency gains by early 2016, with drilling and completion costs and horizontal tank battery construction costs expected to decline by more than 30 per cent and 25 per cent, respectively, compared to 2014.

“We are putting rigs back to work and plan to return to an activity level during 2016 that can result in a similar growth trajectory that we were delivering in the second half of 2014 before the downturn,” said Sheffield.

Pioneer Natural Resources used 28 horizontal wells on production during Q2 in the northern Spraberry/Wolfcamp.

Early production results from 16 wells in the Wolfcamp B interval are on average tracking estimated ultimate recoveries (EURs) of more than 1 million barrels oil equivalent (MMBOE), with average 24-hour peak production rates of approximately 1,900 barrels oil equivalent per day (BOEPD) and 79 per cent oil content.

Pioneer Natural Resources
Photo: Shaun T. Polczer.

Early production results from five wells placed on production in the Lower Spraberry Shale interval are on average tracking EURs of 1 MMBOE, with average 24-hour peak production rates of approximately 1,100 BOEPD and 81 per cent oil content.

Seven of the horizontal wells (six Wolfcamp B interval and one Lower Spraberry Shale interval) benefited from completion optimization testing, the company said.

Pioneer Natural Resource will add an average of two horizontal rigs per month in the northern Spraberry/Wolfcamp during the second half of 2015 (four rigs have already been added) and eight horizontal rigs in the first quarter of 2016, of which six rigs will be added in the northern Spraberry/Wolfcamp and two rigs will be added in the Eagle Ford Shale.

This rig ramp is expected to bring horizontal drilling activity back to the level it was at prior to the oil price collapse in late 2014, Pioneer Natural Resource said in the release.

“Our strong balance sheet, excellent returns and superior derivatives position through 2016 provide us the flexibility to adjust this rig ramp based on the Company’s commodity price outlook and continuing efficiency improvements,” said Sheffield.