Playing the Second Largest Oil Field in the World

File:2004 TX Proof.png

Source: Wikimedia Commons

What would you do with an extra $550 million? Well Pioneer Natural Resources  (NYSE: PXD  ) is going to use the $550 million from the sale of its Alaskan assets to ramp up production in the Spraberry-Wolfcamp play down in the Permian Basin. 

Production ramp up
Pioneer Natural Resources is going to deploy more rigs in the area than it had previously anticipated with the additional cash to capitalize on its massive reserves. Pioneer has already narrowed its production guidance for 2013, and by operating more rigs expect that to be narrowed or raised further in its next earnings call.

Pioneer Natural Resources sees Spraberry-Wolfcamp holding 50 billion barrels of recoverable oil equivalent, which would make it the second largest oil field in the world. The only oil field that's bigger is the Ghawar field in Saudi Arabia. As far as Pioneer's acreage goes, at the end of 2012 it had 1.1 billion barrels of oil equivalent in proven reserves.

With over 40,000 locations to drill Pioneer Natural Resources sees an extra 8 billion boe in recoverable reserves with 7 billion boe coming from the Permian Basin. As Pioneer keeps exploring the huge field its proven reserves will most likely go higher, which will increase its growth runway.

Pioneer Natural Resources is operating 12 rigs in the play, but by 2018 it wants to increase that to 50. That would allow Pioneer to complete way more wells and see booming production growth. In order for Pioneer to operate that many rigs it needs more cash flow.

A focus on Texas
With the sale of its Alaskan assets Pioneer can bring more wells online with the additional rigs and increase its cash flow. Pioneer was going to spend $190 million in 2013 on Alaskan capex, so for the rest of 2013 and beyond it will be able to deploy that capex to the Permian.

Pioneer was producing 80,351 boe/d from Spraberry-Wolfcamp in its second quarter, with plans to ramp that up to ~250,000 boe/d by 2018. Pioneer is going to reach this by spending 60% of its drilling capital in the area (for 2013 and potentially beyond) and use the cash flow growth to keep investing in the area.

In its Southern Wolfcamp joint venture Pioneer is running seven rigs currently, but plans on adding an additional three rigs per year through 2015. This means Pioneer will see well completions go from 86 in 2013 to 165 in 2015.

Pioneer sees oil production from the Permian Basin hitting 3.2 million bpd by 2025 and natural gas production at ~7,500 mmcf/d. This is a huge increase over the current production levels of 1.2 million bpd of oil and ~4,250 mmcf/d of natural gas, and points to the enormous potential of this field.

The Permian Basin, which was once left for dead, is now seeing hundred of billions of dollars poured into it. And Pioneer Natural Resources isn't the only company trying to make a fortune in Texas; Chevron (NYSE: CVX  ) is also throwing its hat into the ring.

Oil major looking for growth
Chevron is looking for growth as many of the world's oil fields are maturing. Chevron owns ~950,000 net acres in the Delaware Basin, which is a part of the Permian Basin. In 2012 Chevron completed ~40 gross wells in the area, and by the end of 2013 Chevron wants to complete ~100 gross wells. Chevron has already added a rig in the area, and by the third quarter of 2013 wants to have three rigs up and running.

Chevron plans on operating ~23 gross rigs in the Permian Basin in 2013, and by 2017 it wants to increase that to ~38. This will propel production from ~125,000 boe/d currently (as estimated by Chevron for 2013) to ~175,000 boe/d by 2017.

This may seem like a small amount compared to the 2.6 million boe/d Chevron produced in 2012, but as Chevron adds more rigs in the area and better drilling techniques reduce spud times and well completion costs, production could easily exceed estimates. The Permian Basin also has the chance to keep Chevron's reserve replacement ratio up. Over the past five years Chevron's reserve replacement ratio has been 112%, and the Permian will enable Chevron to keep up the good work.

Final thoughts
The Permian Basin will provide America with enormous amounts of oil for years. In just a decade production will increase by 1.8 million bpd for crude oil alone. While some may see production peaking at that point keep in mind deeper laterals (which push up the ultimate amount of recoverable oil per well) and downspacing will significantly increase the amount of recoverable reserves. This will increase the growth runway for companies like Pioneer Natural Resources and Chevron and provide more cash flow for investors.

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