When West Texas Intermediate crude was struggling to stay above $50 a barrel, the important issues for a U.S. oil shale producer such as Pioneer Natural Resources (PXD) were How much of production in 2018 was hedged above $50 a barrel? and How quickly the company could continue to cut production costs?
Now, however, that OPEC has agreed to keep its production cuts in place until the end of 2018, those questions have taken a back seat to How quickly can U.S. oil shale producers ramp production? West Texas Intermediate ended its rally of last week today, December 4, by falling 1.58% on fears that U.S. producers will be able quickly to raise output to make up for any OPEC production cuts–and more.
Big production increases by a U.S. oil shale producer–especially if implemented quickly–would allow the company to profit from the higher prices that followed on the OPEC announcement–and to avoid getting boxed in by those price hedges that seemed so smart when oil prices were struggling.
In its third quarter Pioneer Natural Resources, a member of my long-term 50 Stocks Portfolio, reported that it had produced 276,000 barrels of oil equivalent a day, an increase of 6% from the second quarter, despite a loss of 3,500 barrels of production a day due to Hurricane Harvey.
At a recent conference in Singapore Pioneer reported that it would produce about 300,000 barrels a day in the current quarter and projected that it would raise output to more than 1 million barrels a day by 2026.
Fortunately for Pioneer and its investors–and perhaps unfortunately for OPEC–that goal seems reachable for Pioneer.
Pioneer is the dominant producer in the Permian Basin’s Spraberry region with about 800,000 acres under lease. The Spraberry shows a complex geology with reserves trapped in multiple layers. In its early years of drilling in the Spraberry–and Pioneer has been active there since the 1980s–the company exploited relatively shallow formations with vertical drilling. More recently the company has expanded its efforts into vertical drilling in deeper formations (such s the Lower Wolfcamp and Atoka) and has put a new emphasis on horizontal drilling in the Wolfcamp where horizontal wells that follow “seams” of oil in the shale now account for a majority of activity. Recent results show Spraberry/Wolfcamp horizontal production up 13% from the second quarter of 2017.
In the third quarter the company added two rigs in the Spraberry/Wolfcamp effort that have increased the company’s inventory of DUC wells. DUC wells–drilled but uncompleted–give the company the ability to ramp production by quickly finishing the last stages of the well. Pioneer now operates 20 rigs in the Spraberry/Wofcamp and plans to place about 70 wells into production in the Spraberry/Wolfcamp in th fourth quarter of 2017. That will bring the total to 230 wells being placed on production in 2017 in the Spraberry/Wolfcamp. Assuming an oil price of $50 a barrel, Pioneer calculates a projected internal rate of return for this year’s Spraberry/Wolfcamp drilling program in the range of 40% to 75%. Production costs (including production and ad valorem taxes) for Pioneer’s horizontal Spraberry/Wolfcamp wells are projected to continue in a range of $4.00 to $5.00 per barrel of oil equivalent.
All this will cost money and the company projects a capital outlay of $12 billion in the Spraberry/Wolfcamp through 2020 to bring 1,500 new wells into production. To help raise that capital Pioneer has recently signed a $1.7 billion joint venture deal with Sinochem. For 2017 the company has increased its overall capital budget to $2.75 billion from $2.7 billion.
Overall, Pioneer Natural Resources looks like one of the U.S. oil shale producers positioned to take advantage of OPEC’s efforts to restrain production, clear market surpluses, and increase the price of oil.