Last year, Pioneer Natural Resources (PXD) predicted that there were 50 billion barrels of recoverable resources located underneath the Permian Basin, making it the second largest oilfield in the world if that's true. Now Pioneer Natural Resources sees 75 billion barrels of recoverable resources in the basin, with its acreage situated on what could yield 10 BBoe.
Untold potential
Pioneer Natural Resources had 432 MMBoe of proven reserves in the Spraberry/Wolfcamp part of the Permian Basin, which is only a fraction of what Pioneer could possibly uncover. With 20,500 potential drilling locations in the Permian, there are still many stones left unturned. To get a better idea of just how much treasure Pioneer Natural Resources is sitting on, Pioneer is going to spend $3.3 billion this year.
Of that amount, $3 billion is going to be directed toward Pioneer Natural Resources' drilling program, which is the most important thing for shareholders to watch. Breaking it down further, $2.165 billion is being deployed on its northern Spraberry/Wolfcamp acreage, and $205 million is going toward its southern Wolfcamp joint venture with Sinochem Petroleum USA. That's a lot of cash moving around, but just what does Pioneer plan to do with it?
A shift to horizontal
The biggest portion of Pioneer's growth story comes from the multibillion-dollar development of its Permian Basin assets. With just over $2 billion being spent on the region this year, Pioneer plans to add 11 horizontal rigs to its fleet of five in the first quarter of 2014. To compensate for the sharp increase in expenses resulting from the tripling of its horizontal rig count, Pioneer Natural Resources is going to reduce its vertical rig count by four to 11.
Horizontal rigs are important because the only way to access the most prolific parts of the Permian Basin is through horizontal drilling. With a much larger fleet of horizontal rigs at its disposal, Pioneer Natural Resources is guiding to spud 140 horizontal wells at an average lateral length of 8,200 feet this year. Fully 90% of those wells will target the Wolfcamp A,B, and D intervals, while the other 10% will target the Spraberry shale. Pioneer's vertical fleet will drill around 200 wells this year in the Permian Basin.
In the southern part of the Wolfcamp play, Pioneer Natural Resources plans to spud 115 horizontal wells with its Chinese partner. Of those, 100 are expected to be fully completed in 2014. To generate additional production per well and boost returns, Pioneer and Sinochem plan on drilling laterals that are 1,100 feet deeper (13% deeper) this year versus last year. On top of that, two-thirds of those wells will target the Wolfcamp B interval, with a focus on higher-margin counties such as Upton and Reagan.
Not all wells are completed equally
| Location | EUR (MBOE) | D&C Cost | Payout Years | BTAX IRR |
|---|---|---|---|---|
| Lower Spraberry Shale | 575-800 | $7.5 Million | 1.1-2.5 | 45%-100% |
| Wolfcamp D | 650-800 | $8.5 Million | 1.3-2.4 | 45%-95% |
| Martin County Wolfcamp B | 800 | $8 Million | 1.1 | 100%+ |
| Midland County Wolfcamp A | 800 | $8 Million | 1.1 | 100%+ |
| Midland County Wolfcamp B | 1,000 | $8 Million | 1 | 100%+ |
Assumes 7,000-foot laterals, single well drilling costs, $90 per barrel of oil, and $4 per mmBtu of natural gas. Source: Pioneer Natural Resources.
Not every well is equal; some areas offer higher returns than others. This doesn't mean that Pioneer Natural Resources is casting those potential drilling locations aside. Pioneer needs to first grow its production base so it can generate enough operating cash flow to fully develop the less profitable (but still very profitable) parts of the Permian Basin at a later time.
To get a better picture of why this is happening, investors should look at Pioneer's operating cash flow. For 2014, Pioneer Natural Resources expects to generate $2.4 billion in operating cash flow, well short of its $3.3 billion capital expenditure program. To compensate, Pioneer is going to use a combination of cash on hand ($400 million), its operating cash flow, and the proceeds ($550 million) from the divestiture of its Alaskan assets. This is why Pioneer needs to target the shale intervals with the highest returns first, so it can grow its operating cash flow to a level that allows it to invest across the Permian.
What 2014 will bring
This year will see Pioneer Natural Resources' production from the Permian Basin (Spraberry/Wolfcamp) shoot up to 97,500 boe/d (average production rate over the entire year), versus 79,000 boe/d last year. Growth from the Permian Basin will help Pioneer grow its overall output from 161,000 boe/d in 2013 to 188,000 boe/d in 2014 (16.8%).
Beyond 2014, Pioneer hopes to boost its production mix to 75% liquids by 2016 from 65% currently, as liquids output carries higher margins than dry natural gas production. Management has even gone as far to say that by 2018, Pioneer Natural Resources will have doubled its production over 2013 levels. This is a very bullish sign that management is confident in Pioneer's future, which should comfort long-term shareholders.
There is more to Pioneer than just the Permian Basin. Pioneer is also investing $545 million in the Eagle Ford to grow output from 38,000 boe/d last year to 47,000 boe/d this year, while also testing out new drilling techniques to boost the value of each new well brought online.
Foolish conclusion
Pioneer Natural Resources is betting the barn on the Permian Basin, spending all it has to develop its acreage that sits atop the Spraberry and Wolfcamp shale intervals. Even if Pioneer's probable reserve estimates are too high, with over 20,000 potential drilling locations in the area, expect Pioneer's proven reserves in the basin to keep climbing upward.
With strong liquids output growth coming from the Permian Basin and Eagle Ford this year, it may be time to put some money into Pioneer Natural Resources. Pioneer will eventually need to spend within its means or grow into its budget, but there is plenty of room for leeway as one of the best Permian Basin players continues its roar upward.
