Pioneer's startling Permian output-growth plans
Pioneer Natural Resources' growth plans will transform the company and points to a long bull run for Texas's prolific shale play
No single company has managed to ride the rise of the Permian shale as high as Pioneer Natural Resources. Over the past decade, the company has been transformed from a relatively obscure producer plugging away in a slowly dying oilfield in West Texas to one of the hottest growth stories in the industry.
The latest step on that journey came in February, when the company outlined an ambitious plan to expand output from around 240,000 barrels of oil equivalent per day now to 1m boe/d over the next decade. To put that figure in a broader context, Pioneer could add about as much oil from the Permian as Petrobras plans to add in Brazil from the biggest deep-water expansion in oil-industry history. The strategy says a lot about both Pioneer's future—and the Permian's prospects.
The conveniently round numbers involved in the 10-year strategy carry a whiff of marketing spiel, as much as hard-nosed forecasting, so some scepticism is warranted. But this is the Permian—and the play's recent trajectory should give any doubters pause. Pioneer says it can expand output at more than 15% a year at an oil price of $55 a barrel and natural gas price of $3 per 1,000 cubic feet—and do so while improving returns and spending within its cash flow.
The plan implies Pioneer will add an average of around 19,000 boe/d every quarter for the next 10 years, roughly in line with its 2016 growth rate. To get there, it will focus on its core acreage in the Spraberry and Wolfcamp sections of the Permian, where it says it has some 20,000 drilling prospects lined up.
Pioneer's forecast also counts on some further improvements in drilling efficiencies, but nothing beyond what seems in reach today. The company is rolling out what it calls its Version 3.0 Frac Design in 2017, which increases the amount of fracking fluid and proppant pumped into each well by around 30% compared with most of its 2016 wells. It is also drilling wells closer and closer together—100 feet, compared with 240 feet a couple of years ago.
Further efficiencies seem likely given the pace of technological and operating improvement in the Permian in recent years, but they may not be needed. Analysts at Jefferies, an investment bank, modelled the 10-year plan and found the company could reach the target with today's technology by adding about three rigs per year and drilling around 4,500 wells over the next decade. The programme, say the Jefferies analysts, would require investment of $49.2bn over the decade, with spending rising from $2.8bn in 2017 to around $9bn a year by 2026 to sustain the higher production levels.
Depending on Opec?
Some risks are unavoidable—not least the oil price. Another price crash could derail Pioneer's finances and force it to scale back the ambitions. (That said, Pioneer managed to sustain output growth in 2016, when prices fell below $30/b.) It will hope Opec keeps fluffing up international benchmarks.
Pioneer will also have to avoid the pitfalls of rapid organisational growth, keeping costs down and maintaining efficiency as its headcount rises. Service-cost inflation is also a risk. Yet Pioneer, unlike many of its shale rivals, has an in-house well services business that will help shield it from some of that. The company's president, Tim Dove, said in February that he expected Permian-wide service-cost inflation to be between 10% and 15%, but just 5% for Pioneer, which would be offset by efficiency gains. It will be an early test of the company's ability to grow fast and profitably in a time of booming activity and a tightening services sector.
The ambitious plan would, it's safe to say, transform the company. Output of 1m boe/d would likely make Pioneer the largest producer in the Permian and a top 20 publicly listed global producer. Call it the first Permian major.
Pioneer has some unique advantages in the Permian. Because it has been present in the basin for years, it has a large inventory of high-quality acreage it bought cheaply, before the extent of the Permian's shale potential was known. That experience has also given it deep knowledge of the play's geology.
But it isn't the only one pouring money into the Permian in search of growth. Chevron plans to spend at least $2bn there this year, and has hinted it could add 200,000 boe/d by the end of the next decade. ExxonMobil spent $6bn on acreage in the Delaware section of the Permian in January, beefing up its drilling inventory to 4,500 sites—about what Pioneer will have to drill over the next decade to add 0.75m boe/d of new production.
Opec and oil markets should take it all as a signal that another Permian supply train might just be picking up steam again.