Pioneer Posts Third Quarter Financial Impact from Hurricanes
Pioneer has announced financial and operating results for the quarter ended September 30, 2008. Pioneer reported a third quarter net loss of $3 million, or $.03 per diluted share, including several significant noncash charges that totaled $112 million, or $.94 per diluted share (further discussed under Financial Review below). Earnings adjusted for these unusual items were $109 million, or $.91 per diluted share.
The third quarter was also materially impacted by the loss of approximately 3,000 barrels oil equivalent per day (BOEPD) of production due to shutting in and curtailing production related to Hurricanes Ike and Gustav as a result of damage to third-party pipelines and natural gas liquids (NGL) fractionation facilities in Mont Belvieu. In addition, the quarter was affected by declining oil and gas prices and widening differentials relative to NYMEX gas prices.
Despite the production lost as a result of hurricanes during the third quarter of 2008, the Company continued to generate strong production growth of 11% from the prior-year quarter (excluding 2007 sales from divested Canada assets). Pioneer's strong growth performance is also reflected in the results for the nine months ended September 30, 2008, with production rising 18% from levels achieved for the same period of 2007.
Production from Pioneer's core growth assets (including Spraberry, Raton, Edwards, Tunisia and Alaska) increased 23% for the nine-month period compared to the same period in 2007.
Other recent highlights included:
- Announced approval by the Railroad Commission of Texas in October of optional 20-acre downspacing in the Spraberry field.
- Received encouraging results from additional Spraberry 20-acre drilling and shale interval testing.
- Increased Wolfberry (Spraberry field) acreage position by approximately 30,000 gross acres.
- Drilled first two Pierre Shale horizontal wells, which encountered intense natural fracturing and gas shows.
- Drilled two new discovery wells in Tunisia and one in the Edwards Trend of South Texas.
- Announced a substantial acreage position in the Eagle Ford Shale (South Texas) gas window and began drilling first horizontal well.
- Initiated production from the most prolific well in the South Coast Gas Project ahead of schedule.
- Repurchased approximately two million shares of stock (includes third quarter and October repurchases).
- Generated free cash flow (discretionary cash flow in excess of capital expenditures).
Low Price Environment Initiatives
Concerns that the worldwide economic slowdown will negatively impact the demand for energy have resulted in a significant drop in commodity prices since their highs earlier in 2008. Even in the lower price environment, Pioneer's financial position remains strong. The Company has no significant bond maturities until 2013, has $775 million of liquidity under its senior unsecured credit facility that matures in 2012 and has significant capacity under its debt covenants. Pioneer expects capital spending for 2008 to be within cash flow. Pioneer has also hedged approximately 20% of its oil production in 2009 and 2010 utilizing collars with a floor price of $100 per barrel and a ceiling price of more than $190 per barrel.
As a result of the significant drop in commodity prices, the Company has started implementing initiatives to reduce capital spending and preserve financial flexibility. Specifically, the Company is implementing a plan for a near-term $60 per barrel of oil and $6 per thousand cubic feet (MCF) of gas environment. This plan includes minimizing drilling activities until margins improve as a result of (i) commodity prices improving, (ii) gas price differentials in the areas where the Company produces gas improving relative to NYMEX quoted prices and/or (iii) well cost reductions. The Company is focused on delivering free cash flow in 2009 and beyond. As a result, Pioneer is reducing its rig activity by approximately 60% and is pursuing reductions in well costs of 20% to 30% to align costs with the lower commodity price environment that currently exists. Rigs are being terminated or stacked in the Spraberry, Raton, Edwards Trend, Barnett Shale and Mid-Continent areas. The Company is also reducing the number of well service units running in the Spraberry field from 42 to 30, 15 of which are lower-cost well service units that are owned by Pioneer.
In 2009, the Company expects to reduce the capital budget by 30% to 60% compared to 2008 and generate free cash flow. Even with a significantly reduced capital budget in 2009, Pioneer expects 5% to 10% production growth. The low end of the production growth range reflects a $60 per barrel/$6 per MCF environment, while the high end of the range reflects current strip prices. Pioneer's ability to increase production with limited capital highlights the quality of its long-lived, low-decline assets and the low-risk drilling nature of these assets.
Production growth for 2009 will also benefit from the October startup of the most prolific well in the South Coast Gas project (South Africa), infrastructure expansion currently being completed in the Edwards Trend and reduced commitments under Pioneer's volumetric production payment (VPP) agreements. The Company's Oooguruk project on the North Slope of Alaska is also expected to generate significant growth in 2009 and 2010.
Scott Sheffield, Chairman and CEO, stated, "Pioneer's assets continue to perform at or above expectations, and our strategy to deliver low-risk, consistent growth and free cash flow remains intact. We have a large drilling inventory of over 20,000 locations, over 1.8 billion barrels of net resource potential and upside from several new shale plays. In an $80 per barrel and $8 per MCF environment with proportional well cost reductions, we would ramp up drilling activity to be in a position to deliver the Company's prior 14+% compound annual production per share growth target. Free cash flow will be utilized to continue to reduce outstanding shares, decrease debt and pursue bolt-on acquisition opportunities."
Cash flow from operating activities for the third quarter was $303 million. Third quarter sales averaged 111,838 BOEPD, consisting of oil sales averaging 30,406 barrels per day (BPD), NGL sales averaging 18,921 BPD and gas sales averaging 375 million cubic feet per day (MMCFPD).
The reported third quarter average price for oil was $81.51 per barrel and included $9.34 per barrel related to deferred revenue from VPPs for which production was not recorded. The reported price for NGLs was $62.24 per barrel. The reported price for gas was $7.99 per MCF, including $.39 per MCF related to deferred revenue from VPPs for which production was not recorded.
Third quarter production costs averaged $15.13 per BOE. Production costs were primarily impacted by fixed costs associated with wells shut-in or curtailed by the recent hurricanes and higher energy-related costs.
Depreciation, depletion and amortization (DD&A) expense averaged $12.39 per BOE for the third quarter. DD&A expense increased primarily due to losing end-of-well-life reserves that became uneconomical as a result of lower quarter-end gas prices and significantly wider gas differentials in certain areas relative to the NYMEX gas price.
Noncash charges for the third quarter totaling $112 million (on an after-tax basis) included a receivable allowance of $12 million ($.10 per share) for unpaid pre-bankruptcy claims for condensate sold to certain subsidiaries of SemGroup, L.P., an Equatorial Guinea exit charge of $5 million ($.04 per share), drilling and acreage charges related to the abandonment of Pioneer's Lay Creek coal bed methane (CBM) and Delaware shale projects of $38 million ($.32 per share), and an impairment charge to reduce the carrying value of Pioneer's Uinta Piceance assets of $57 million ($.48 per share) as a result of lower gas prices.
Exploration and abandonment costs were $111 million for the quarter and included $30 million of acreage and unsuccessful drilling costs, $60 million related to the previously discussed noncash charge to abandon the Lay Creek CBM and Delaware Shale projects and $21 million of geologic and geophysical expenses, including seismic in the Edwards Trend and Tunisia and personnel costs.
In the Spraberry field, the Railroad Commission of Texas has approved Pioneer's petition for a field rule change to allow optional fieldwide 20-acre downspacing. Pioneer has identified 9,500 drilling locations across its acreage where it intends to utilize 20-acre downspacing in future years. Based on historical downspacing performance, the Company expects internal rates of return similar to 40-acre Spraberry wells. Recoveries from these wells are expected to be at least 75% to 80% of the gross economic ultimate recovery of a 40-acre Spraberry well (100,000 barrels oil equivalent from 40-acre wells). Results from the nine 20-acre wells drilled year-to-date reflect similar rates of production to offset 40-acre wells and are supportive of these expectations.
Pioneer has also continued testing of the shale/silt non-traditional intervals in the Spraberry field. An analysis of the initial 650-foot core that was taken from these intervals indicates that up to 30 feet of additional net pay is present. The Company also increased its Wolfberry acreage position in the Spraberry Trend by approximately 30,000 acres.
In two horizontal wells recently drilled in the Pierre Shale in the Raton Basin, Pioneer encountered intense natural fracturing and gas shows. The first well is currently being fracture stimulated, and preparations are underway to fracture stimulate the second well.
In South Texas, Pioneer drilled another discovery well with resource potential of at least 25 billion cubic feet. The Company is also drilling and coring its first horizontal well in the Eagle Ford Shale play where it holds a substantial acreage position in the gas window. The Eagle Ford Shale overlays the Edwards Trend in the 310,000 acres that Pioneer holds.
In Tunisia, the Company's initial well in the Anaguid concession (Pioneer-operated) was a discovery that tested oil, gas and condensate at 2,300 BOEPD. Another discovery was also announced in the Cherouq concession and is currently being tested. Pioneer has participated in nine Cherouq discoveries to date for a Silurian success rate of 70%. Two of the four wells that were unsuccessful in the Silurian are being tested in other zones.
The most prolific well in the South Coast Gas (SCG) project offshore South Africa has been placed on production ahead of schedule. Gross production from SCG is currently averaging 68 million cubic feet equivalent per day (MMCFEPD) and is expected to gradually increase to a range of 80 MMCFEPD to 90 MMCFEPD in early 2009, with no additional capital required.
Fourth quarter 2008 production is forecasted to average 114,000 BOEPD to 119,000 BOEPD, reflecting the impact of production that continues to be shut-in and/or curtailed due to the hurricanes. The interruption is expected to continue through mid-November, resulting in an average loss of 2,000 BOEPD for the quarter. Overall production is expected to increase during the fourth quarter, driven primarily by increases in several of Pioneer's core areas (Spraberry, Edwards, Tunisia and Alaska). The forecasted fourth quarter production range includes production that is attributable to the public ownership in Pioneer Southwest Energy Partners L.P. (Pioneer Southwest). The expense estimates below also include amounts attributable to the public ownership in Pioneer Southwest.
Fourth quarter production costs (including production and ad valorem taxes and transportation costs) are expected to average $14.00 to $15.00 per BOE based on current NYMEX strip prices for oil and gas. DD&A expense is expected to average $13.00 to $14.00 per BOE, reflecting losing incremental end-of-well-life reserves based on current NYMEX strip prices for oil and gas.
Total exploration and abandonment expense during the fourth quarter is expected to be $40 million to $70 million, including up to $45 million associated with drilling in lower-risk resource plays in the Edwards Trend and Tunisia and $25 million of seismic activity and personnel costs.
General and administrative expense is expected to be $35 million to $39 million. Interest expense is expected to be $36 million to $40 million. Accretion of discount on asset retirement obligations is expected to be $2 million to $4 million.
Minority interest in consolidated subsidiaries' net income is expected to be $8 million to $10 million, primarily reflecting the public ownership in Pioneer Southwest.
The Company also expects to recognize $40 million to $45 million of charges in other expense associated with certain drilling rigs being terminated or stacked as a result of the Company's low price environment initiatives.
The Company's fourth quarter effective income tax rate is expected to range from 40% to 50% based on current capital spending plans. Cash taxes are expected to be $15 million to $20 million and are primarily attributable to Tunisia.
Fourth quarter 2008 amortization of deferred losses on terminated oil and gas hedges is expected to be $23 million. The Company's financial results, oil, NGL and gas hedges and future VPP amortization are outlined on the attached schedules.
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