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Pioneer sticks with capex plan on strong hedges

27 Jun 2017 16:39 (+01:00 GMT)
Pioneer sticks with capex plan on strong hedges

Houston, 27 June (Argus) — Pioneer Natural Resources is sticking with its 2017 capital expenditure (capex) plans even as oil prices fall because of strong hedge cover.

The independent has 85pc of its 2017 output covered at around $50/bl Nymex WTI, protecting cash flow although the benchmark dipped to less than $43/bl last week. For 2018, the number has risen to 35pc from 20pc at the end of the first quarter, and the producer continues to work to move it up close to 85pc, chief executive Tim Dove said in the JP Morgan Energy Equity Conference.

"That is why we keep our campaign running," Dove said.

Pioneer, which has set out a 10-year target to grow output by 15pc annually to 1mn b/d of oil equivalent (boe/d) by 2026, has increased its 2017 capex to $2.8bn from $2.1bn a year earlier, targeting 15-18pc output growth compared to 2016.

Another advantage large producers like Pioneer are likely to enjoy is that the increase in costs of services, such as rigs and other equipment, that was expected on the back of the recovery in prices in the first quarter may not happen with prices now falling. There is "not much room for inflation," he said.

Overall, lower costs and continued improvements to technology mean the independent's total cash cost is about $18-$20/bl, giving it an internal rate of return of (IRR) of 40pc at current oil prices compared to a 50-100pc IRR at above $50/bl.

Dove also noted that producers that have already added rigs so far will end up with higher output growth later this year and into 2018. Many companies are seeing a longer lag time because of so-called pad drilling, which means drilling many wells from one location instead of moving the rig around, to boost efficiency and lower costs. It can take six to eight months from rig deployment to production for a pad site because of the multiple wells that will be drilled, compared with a more usual two to four months for single well site.That means even if producers take a break now and stop adding rigs, output will still grow at least out to 2018, he said.

"You can count on Permian growth," he said. "Incrementally, you can take a break but it is not likely to have an impact."

But Pioneer may make a decision in the second half of the year on pausing its drilling and capex plans if oil prices continue to stay around the current levels, which may have impact on 2019 output. It plans to increase its rig count to 18 at its core Spraberry/Wolfcamp acreage in the Permian basin, from 17 as of the end of the year. It had steadily ramped up drilling in the area in the fourth quarter, by increasing the rig count from 12.