Pioneer Natural Resources Company announced financial and operating results for the quarter ended December 31, 2008.
Scott Sheffield, Chairman and CEO, stated, "Pioneer's low-decline, low-risk assets are particularly advantageous in the current commodity price environment and continue to perform above expectations. We have further cut our 2009 capital spending plans to $250 million to $300 million to ensure free cash flow despite low commodity prices. Our current focus is on reducing production and well costs in preparation for re-activating our drilling program when oil and gas prices rise to a sustained level of approximately $60 per barrel and $6 per MCF."
To enhance the Company's financial flexibility (and increase net asset value per share), the Company is evaluating the merits of executing volumetric production payments, a drop down for cash of up to $200 million of producing assets to Pioneer Southwest Energy Partners L.P. and other alternatives. The Company cannot predict the timing or ultimate outcome of any such actions as they are subject to market conditions, among other factors.
Cost Reduction Initiatives
As a result of the significant drop in commodity prices, the Company has implemented initiatives to reduce capital spending and operating costs to ensure the delivery of free cash flow in 2009 and to enhance financial flexibility. This plan includes minimizing drilling activities until margins improve as a result of (i) increased commodity prices, (ii) reduced gas price differentials relative to NYMEX quoted prices in the areas where the Company produces gas and/or (iii) decreased well costs.
Pioneer has reduced its operated rig activity from 29 rigs in the third quarter of 2008 to three rigs in mid-February. The Company is continuing to work with drilling and service providers to reduce drilling and completion costs. To date, Pioneer has achieved reductions of 15% to 20% and is targeting an additional 10% to 20% reduction. Rigs have been terminated or stacked in the Spraberry, Raton, Edwards Trend and Barnett Shale areas.
Pioneer's asset teams are also implementing initiatives to reduce controllable production costs, including costs associated with fuel surcharges, electricity supply, water disposal and compression rental.
2009 Capital Spending and Production Growth
In 2009, the Company expects capital spending to total $250 million to $300 million (excluding acquisitions, asset retirement obligations, capitalized interest and geological and geophysical G&A). Approximately 75% of this amount is for drilling, primarily in Alaska and the Spraberry field. The remaining 25% will be used for facility expansions and upgrades to Pioneer's core assets.
In 2009, Pioneer expects to grow production by at least 5% per share, highlighting the attractiveness of Pioneer's low-decline-rate assets. Minimal capital of approximately $200 million would be required to keep 2009 production flat.
The net effect of unusual items in the fourth quarter reduced results by $48 million (on an after-tax basis). These unusual items included:
The fourth quarter was also negatively impacted by the loss of approximately 5,000 BOEPD of production due to curtailed or shut-in production related to damage to third-party pipelines and natural gas liquids (NGL) fractionation facilities in Mont Belvieu resulting from Hurricane Ike. Results were also affected by declining oil and gas prices and widening differentials relative to NYMEX gas prices.
Cash flow from operating activities for the fourth quarter was $212 million.
Fourth quarter sales averaged 117,899 BOEPD, consisting of oil sales averaging 33,696 barrels per day (BPD), NGL sales averaging 17,510 BPD and gas sales averaging 400 million cubic feet per day (MMCFPD).
The reported fourth quarter average price for oil was $55.77 per barrel and included $8.36 per barrel related to deferred revenue from VPPs for which production was not recorded. The reported price for NGLs was $31.01 per barrel. The reported price for gas was $6.26 per MCF, including $.37 per MCF related to deferred revenue from VPPs for which production was not recorded.
Fourth quarter production costs averaged $14.97 per BOE, down $.16 from the third quarter of 2008. Reduced production taxes and lease operating expenses (LOE) were partially offset by higher natural gas processing expenses. The increase in natural gas processing expenses reflected reduced third-party revenue as a result of lower NGL and gas prices.
Depreciation, depletion and amortization (DD&A) expense averaged $14.76 per BOE for the fourth quarter. DD&A expense increased primarily due to losing end-of-well life reserves that became uneconomical as a result of lower quarter-end commodity prices.
Exploration and abandonment costs were $56 million for the quarter and included $38 million of acreage and unsuccessful drilling costs and $18 million of geologic and geophysical expenses, including seismic data in the Edwards Trend and Tunisia and personnel costs.
During December 2008 and January 2009, the Company entered into the following new oil, NGL and gas derivatives for 2009 and 2010:
In addition, the Company also entered into 2009 basis swaps for 165,836 MMBTUPD of Mid-Continent gas production and 10,000 MMBTUPD of Spraberry gas production at $1.18 per MMBTU and $0.99 per MMBTU, respectively.
In the Spraberry field, Pioneer drilled 370 wells in 2008 and grew production for the third consecutive year. Production in 2008 was 13% higher than in 2007. During February, the Company is reducing the number of rigs to two, down from a peak of 17 rigs in the third quarter of 2008. In addition to ongoing 40-acre field development, the Railroad Commission of Texas approved Pioneer's petition for a field rule change to allow optional fieldwide 20-acre downspacing. Pioneer has identified approximately 9,500 drilling locations across its acreage where it intends to utilize 20-acre downspacing in future years. In 2008, 18 wells were drilled on 20-acre spacing, and 12 were put on production with encouraging results.
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. Non-traditional intervals in two wells each tested at a stabilized rate of approximately 20 BOEPD. Testing of shale/silt intervals is currently underway in 10 additional wells.
A discovery was made in a deeper zone (Pennsylvanian) below the Wolfcamp zone. Initial production at the time of the discovery in October 2008 was approximately 600 BOEPD. Production has now stabilized around 300 BOEPD with more than 40,000 cumulative BOEs recovered since October. The Company is planning further testing to evaluate the play.
In 2008, the Company drilled 153 wells in the Raton Basin in Colorado, including 144 coal bed methane wells and 9 Pierre Shale wells. This drilling program generated production growth in the Raton field for the fourth year in a row, with 2008 at 16% above 2007. Two Company-owned rigs are currently stacked and a Raton frac crew has temporarily been relocated to the Spraberry field in West Texas. In two horizontal wells recently drilled and completed in the Pierre Shale, Pioneer encountered intense natural fracturing and gas shows. The wells were successfully fracture stimulated and produced at initial flow rates of approximately 3 MMCFPD and 1.5 MMCFPD.
In South Texas, Pioneer drilled 36 wells in 2008 and completed the final portion of more than 900 square miles of 3-D seismic data. Production increased for the second year, 41% above 2007. Two new fourth quarter discovery wells and new 3-D seismic data have identified additional resource potential of at least 150 BCF in this play. The Company has drilled 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. Current plans are to fracture stimulate the well in late March or early April.
On Alaska's North Slope, drilling results have been better than expected and Pioneer achieved its targeted 2008 net production exit rate of more than 3,000 BPD as of year end. Net production originally was expected to average 5,000 BPD in 2009 and gradually increase to 10,000 BPD to 14,000 BPD in 2011 as development drilling continues; however, initial production from the most recent well was approximately 7,000 gross BPD and its impact on 2009 through 2011 production is being evaluated.
In Tunisia, gross production has reached 34 MBOEPD. The Company's net production grew 54% in 2008. Drilling is currently curtailed until new 3-D seismic data is fully processed and economic conditions improve. Pioneer and other industry players are continuing to progress the FEED study for a gas pipeline from Southern Tunisia to northern industrial areas.
The most prolific well in the South Coast Gas (SCG) project offshore South Africa was placed on production during the fourth quarter of 2008, ahead of schedule. Gross production from SCG is currently averaging approximately 70 million cubic feet equivalent per day (MMCFEPD) and is expected to gradually increase to a range of 80 MMCFEPD to 90 MMCFEPD by the second quarter of 2009, with no additional capital required. Production costs have also decreased significantly with the release of the FPSO vessel from the Sable oil field.
First quarter 2009 production is forecasted to average 117,000 BOEPD to 122,000 BOEPD. The forecasted first 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.
First quarter production costs (including production and ad valorem taxes and transportation costs) are expected to average $13.50 to $14.50 per BOE based on current NYMEX strip prices for oil and gas. DD&A expense is expected to average $13.25 to $14.25 per BOE.
Total exploration and abandonment expense during the first quarter is expected to be $20 million to $30 million, primarily related to exploration drilling in Tunisia, acreage charges, and seismic and personnel costs.
General and administrative expense is expected to be $32 million to $36 million. Interest expense is expected to be $38 million to $41 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 $5 million to $8 million, primarily reflecting the public ownership in Pioneer Southwest.
The Company also expects to recognize $25 million to $30 million of charges in other expense associated with certain drilling rigs being terminated and stacked as a result of the Company's low price environment initiatives.
The Company's first 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 $5 million to $10 million and are primarily attributable to Tunisia.
First quarter 2009 amortization of deferred gains on terminated oil and gas hedges is expected to be $29 million. The Company's financial results, oil, NGL and gas derivatives and future VPP amortization are outlined on the attached schedules.
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