Source: Pioneer Natural Resources, Sands Weems.
Pioneer Natural Resources' (PXD 0.10%) second-quarter results were surprisingly strong as the company is doing a really good job operating in the current tough environment. It's an environment the company's CEO Scott Sheffield addressed head-on during its second-quarter conference call. Here are five things he wanted investors to know.
1. We have no change to our guidance
While Pioneer Natural Resources' second-quarter production was strong, that was because the company's Spraberry/Wolfcamp production growth offset weaker-than-expected results from the Eagle Ford. That said, despite the Eagle Ford weakness, Sheffield wanted investors to know that the company was "maintaining our production growth forecast of 10% plus for 2015." However, this is mainly due to the fact that it's "increasing the Spraberry/Wolfcamp full-year growth rate of up to 22% to 24%." While this shows some of the benefits of diversification, the real key here is just how strong the company's core Spraberry/Wolfcamp assets are performing in the weak operating environment.
2. Our costs are really coming down
One of the real surprises in its second-quarter report is just how much its costs have fallen over the past year. Sheffield pointed out that the company's capital expenditures costs are already down 20%-25% year over year with the expectation that they'll decline by 30% as we head into 2016. Further, operating costs are down 17% year over year, which is really driving improved cash flow. This is enabling the company to get more production for less money, muting some of the sting of lower oil prices. Further, more cost reductions could be on the way as Sheffield noted, "[I]f oil prices continue to stay sub $50, I expect the costs ... will be under more pressure to come down even further."
3. We're bringing our activity back to pre-crash levels
Thanks to these cost reductions as well as the company's really strong balance sheet, Pioneer is ramping up its rig count to fuel production growth in 2016 and beyond. Sheffield said, "The rig ramp is expected to bring horizontal activity back to the level it was at prior to the oil price collapse in late 2014."
The main reason for the ramp is because the "IRRs, which are most important ... range from 45% to 60% at current strip prices (or projected future prices)" while in a "$50 flat environment, we're still getting 30% to 35% returns." In other words, the returns are just too good to pass up right now, even in a low oil price environment. That being said, Sheffield did warn, "If oil prices go to $40 and stay at $40, for the next 18 months, obviously, we'll most likely slow down. But ... there's no reason at this point in time to slow down." Basically, the company plans to continue with its current activity ramp despite the big drop in the oil price over the past month.
Source: Pioneer Natural Resources, Sands Weems.
4. Here's why we're growing
While Pioneer Natural Resources' returns are what's fueling its decision to accelerate growth, there's another big driver behind that decision. Sheffield holds the view that shale is becoming the best way for energy companies to invest for the future. He said:
I personally think shale oil will out survive LNG projects around the world, it'll survive new exploration projects, they'll survive essentially all other shale plays in the U.S. in the Midland Basin. And so the world needs the Permian Basin. And so eventually supply/demand is going to reset. And the longer it stays lower, oil prices are going to bounce back even quicker. It's going to be very volatile the next several years.
His view is that as oil stays lower for longer it will create a future where oil prices will be much higher because companies won't invest in LNG or offshore projects leading to a potential future energy shortfall. He wants his company to be ready for that, which is why it's growing production during a tough environment so that it can really perfect shale drilling. That way when prices do rebound, Pioneer will reap the windfall.
5. We're making progress in getting the oil export ban lifted
Another thing Sheffield discussed on the call was his more optimistic view that the U.S. will finally end the oil export ban. He has been a leading advocate of lifting the ban, which he now views as being much closer to becoming a reality. He updated investors on the progress:
I expect both the House and the Senate ... to vote on lifting the ban sometime in late September or early October. ... Something that's helping us significantly and we're getting out the message obviously, if we're allowing Iran to export oil, why not our U.S. producers? In addition, it was disclosed last week that we're importing Russian oil up into the northeast refineries. So why let the Russians export oil to the U.S.? ... I'm getting more optimistic -- above 50% now -- [that the ban will be lifted].
In a sense, Pioneer and other industry advocates are using recent foreign policy changes as a key part of their message to Washington, which is why Sheffield now sees a more than 50% chance the ban will be lifted before the end of the year. Further, in a bit of a footnote, the U.S. did recently lift some more restrictions enabling U.S. oil to be exchanged for Mexican oil. It's another step toward full exports.
Investor takeaway
Pioneer's costs are coming down, enabling the company to do more with less money. That's driving the company's decision to resume strong production growth as it positions the company for what it sees as a stronger future market, especially if U.S. producers can export oil and capture higher global prices.
