Pioneer Natural Resources (PXD) Earnings Report: …s.t.st/media/xtranscript/2015/Q3/13246109.pdfthe...
Transcript of Pioneer Natural Resources (PXD) Earnings Report: …s.t.st/media/xtranscript/2015/Q3/13246109.pdfthe...
CompanyName:PioneerNaturalResourcesCoCompanyTicker:PXDSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:18.42BPriceasofEventDate:125.6
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PioneerNaturalResources(PXD)EarningsReport:Q22015ConferenceCallTranscriptThefollowingPioneerNaturalResourcesconferencecalltookplaceonAugust5,2015,10:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
FrankHopkins;PioneerNaturalResourcesCompany;SVP,IRScottSheffield;PioneerNaturalResourcesCompany;Chairman,CEOTimDove;PioneerNaturalResourcesCompany;President,COORichDealy;PioneerNaturalResourcesCompany;EVP,CFO
OtherPart icipants
DougLeggate;BankofAmericaMerrillLynch;AnalystCharlesMeade;JohnsonRice;AnalystLeoMariani;RBCCapitalMarkets;AnalystMichaelHall;HeikkinenEnergyAdvisors;AnalystJohnFreeman;RaymondJames;AnalystBrianSinger;GoldmanSachs;AnalystMikeKelly;GlobalHunterSecurities,LLC;AnalystNealDingmann;SunTrustRobinsonHumphrey;AnalystRobertChristensen;ImperialCapital;AnalystPaulSankey;WolfeResearch;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometothePioneerNaturalResourcessecond-quarterconferencecall.JoiningustodaywillbeScottSheffield,ChairmanandChiefExecutiveOfficer;TimDove,PresidentandChiefOperatingOfficer;RichDealy,ExecutiveVicePresidentandChiefFinancialOfficer;andFrankHopkins,SeniorVicePresidentofInvestorRelations.
PioneerhaspreparedPowerPointslidestosupplementtheircommentstoday.TheseslidescanbeaccessedovertheInternetatwww.pxd.com.Again,theInternetsitetoaccesstheslidesrelatedtotoday'scalliswww.pxd.com.AtthewebsiteselectInvestorsandthenselectEarningsandWebcasts.Thiscallisbeingrecorded,andareplayofthecallwillbearchivedontheInternetsitethroughAugust30.
TheCompany'scommentstodaywillincludeforward-lookingstatementsmadepursuanttotheSafeHarborprovisionsofthePrivateSecuritiesLitigationReformActof1995.ThesestatementsandthebusinessprospectsofPioneeraresubjecttoanumberofrisksanduncertaintiesthatmaycauseactualresultsinfutureperiodstodiffermateriallyfromtheforward-lookingstatements.TheserisksanduncertaintiesaredescribedinPioneer'snewsreleaseonpage2oftheslidepresentationandinPioneer'spublicfilingsmadewiththeSecuritiesandExchangeCommission.
Atthistimeforopeningremarks,IwouldliketoturnthecallovertoPioneer'sSeniorVicePresidentofInvestorRelationsFrankHopkins.Pleasegoahead,sir.
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FrankHopkins (SVP,IR):
Thankyou,Lisa.Goodday,everyone,andthankyouforjoiningus.I'mgoingtobrieflyreviewtheagendafortoday'scall.Scottwillbethefirstspeaker.Hewillprovidethefinancialandoperatinghighlightsforthesecondquarterof2015andthenhe'lldiscussourlatestoutlookfortheremainderoftheyear.AfterScottconcludeshisremarks,Timwillreviewoursecond-quarterhorizontaldrillingresultsintheSpraberryWolfcampandtheEagleFordshale.
He'llalsodiscussthesignificantprogresswe'remakingtoreducecostsandbecomemoreefficientinresponsetotheoilmarketdownturn.HealsoprovidedetailsregardingthelatestplansforourSpraberryWolfcampinfrastructureprojectsandtheeconomicdriversbehindtheseprojects.
Richwillthencoverthesecond-quarterfinancialsinmoredetailandprovideearningsguidanceforthethirdquarter.Afterthat,we'llopenupthecallasusualforyourquestions.
Sowiththat,Scott,I'llturnthecallovertoyou.
Scott Shef f ie ld (Chairman,CEO):
Thanks,Frank.Goodmorning.Onslidenumberthree,startingoffthesecondquarteradjustedincomeof$15millionor$0.10perdilutedshare,wehadalreadypreannouncedproductioninthesecondquarterof197,000barrelsofoilequivalentperday,51%ofoil,obviouslydrivenbythestrongSpraberryWolfcampproductiongrowththroughthehorizontaldrilling,andthenobviouslywehadannouncedlower-than-expectedproductionintheEagleFordandWestPanhandlefield.
Wearemaintainingourproductiongrowthforecastof10%plusfor2015.Obviously,we'reincreasingtheSpraberryWolfcampfull-yeargrowthrateofupto22%to24%.
WehadalreadyannouncedclosingandthesaleoftheEagleFordmidstreambusinessfor$2.15billion.Alreadyreceived$530millionatclosing.Theadditional$500millionwillcomeininJulyof2016.
Inaddition,you'realreadyseeingbenefitfromfeereductionsunderexistingdownstreamprocessingandtransportationcontractsroughlytoPioneer$100millionNPV.
We'rerealizingsignificantservicecostreductionsandefficiencygains.We'reshowing20%to25%alreadydecreaseindrillingandcompletioncostscomparedto2014.Weexpectcapitalcoststodeclinebygreaterthan30%goinginto2016.
We'reseeinga20%reductioninhorizontaltankbatteryconstructioncosts,alreadyexpectthatnumbertobegreaterthan25%.17%reductionalreadyinLOEinthesecondquarterversusallof2014.
Acoupleofmorecommentstogiveyouanideaofefficiencygains.IwasoutinthefieldjustlastweekinthePermianBasin.We'realreadyseeingrecordsbeingsetinourWolfcampBwells.Ourlast10wellshaveaveragedtodrilltoTDof20days.WeactuallysetarecordwithaSaleRanchroyalin13days.We'reseeingrecordsoccurweeklyaswe'removingforward,especiallyfocusingononezone,primarilytheWolfcampB.
Inaddition,ifoilpricescontinuetostaysub$50,IexpectatthecostIjustmentionedservicecostswillbeundermorepressuretocomedownevenfurther.SoIthinkwe'llgetmoregainsinasub$50,$50orsubenvironment.
Slidenumber4,28horizontalwellsplacedonproductionduringthesecondquarterof2015inthenorthernSpraberryWolfcamp.EarlyproductionresultsintheWolfcampBfrom16wells,theyaretrackingabove1millionBOEequivalentwithanaverage24-hourrateof1900barrelsofoilequivalentperday
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with79%oilcontent.
ResultsfromthefivewellsintheLowerSpraberryShaleareaveraging1millionbarrelsofoilequivalentwitha24-hourpeakrateof1100barrelsofoilequivalentwith81%oilcontent.Sobothcontinuedtoaverageveryhighoilcontent.
Timwilltalkmoreaboutoursevenwellsbenefitingfromourcompletionoptimizationandwhatwearedoingthere,butwe'reseeingtremendousresultsfromoursixWolfcampBwellsandoneLowerSpraberryShalewell.
TheaverageproductionfromalltheWolfcampBandWolfcampAwells,since2013inthenorth,aretrackingEURsof1millionbarrelsofoilequivalent.
I'mchangingthetopicinregardtoexportingcondensate.We'recontinuingtoexportthesameamount,20,000barrelsaday,inthesecondquarter.Obviously,wesignificantlyimprovedpricingascomparedtodomesticcondensatesales.
Wedidaspotcargoof6000barrelsadaythispastJune.
Wearecontinuingoureffortsonliftingtheban.Ithinkwehadlastweekwasveryimportantinthatregard.BothwehadcommentsfromtheSpeakeroftheHouse,verypositivesupportinglistingtheexportban.TheSenateactuallyhadavoteintheEnergyCommitteeinregardtoliftingtheban.IexpectboththeHouseandtheSenate--fullSenate,fullHouse--tovoteonliftingthebansometimeinlateSeptemberorearlyOctober.
Onmyrecentvisits,somethingthatishelpingussignificantlyandwe'regettingoutthemessageobviously,ifweareallowingIrantoexportoil,whynotourUSproducers?
Inaddition,itwasdisclosedlastweekthatweareimportingRussianoilupintotheNortheastrefineries.SowhylettheRussiansexportoiltotheUS?WhyallowIrantoexportoilandnotletUSproducers?SoIamchanging--I'mgettingmoreoptimisticabove50%now.
Goingtoslidenumber5,outlook,strongcommoditypositionscontinuetoprotectcashflow.Weprobablyhavethebest--Imean,ifwelookat2015and2016combinedintheindustry,wehavecoveragefor90%ofouroilfor2015at$71,75%ofouroilfor2016inthreeways,andprettymuchwhenyoulookintheexhibitsandbackbetween$47and$67,weget$67withupsideto$77.Soobviously,ifcrudestayswhereititis,evenfornextyear,wearegoingtoget$67formostoftheyearfor75%ofourcrude.
Wedohavegoodcoverageforgas:again85%in2015and65%in2016.
We'vegotastrongbalancesheetinthesecondquarter.Debttobook23%.Obviously,withthecloseofEagleFordinearlyJuly,itfurtherenhancethat.CashonhandtheendofJulyisabout$700million.
Weplantoadd,aswehavestated,twohorizontalrigspermonthinthenorthduringthesecondhalfof2016andalsoplantoaddeightrigsinthefirstquarterof2016.SixrigsinthenorthandtworigsintheEagleFord.
Therigrampisexpectedtobringhorizontalactivitybacktothelevelitwasatpriortotheoilpricecollapseinlate2014.We'vealreadyaddedfourrigs.TheIRRs,whicharemostimportant,whatarethereturnsinthistypeofpriceenvironment?TheSpraberryWolfcampandtheEagleFordrangefrom45%to60%atcurrentstripprices,includingallcoststank,battery,solar,disposalofcapitalcosts.
Forexample,alsoina$50flatenvironment,wearestillgetting30%to35%returns.
Wehaveminimalimpacton2015productionobviouslyduetothetimerequiredtodrillandcomplete
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thesemulti-wellpads.Andwecontinueovertothe2016to2018period,provideaCAGRproductiongrowthrateof15%pluswithanoilgrowthrateof20%plus.
Insummary,withastrongbalancesheet,world-classassetswithgreatreturns,asuperiorderivativepositionthrough2016,itgivesustremendousflexibilitytoadjusttherigrampbasedontheCompany'scommoditypriceoutlookandcontinuingefficiencyimprovements.
OnethingIcanobviouslysay,wealwaysgetaskedwhatcommoditypricewhenyouslowdown?Youknow,ifoilpricesgoto40andstayat40,forthenext18months,obviouslywewillmostlikelyslowdown.Butaslongasinourhedgepositionsandthestripoccurs,thereisnoreasonatthispointintimetoslowdown.
Slidenumber6.Inregardtoourdrillingbudgetof$2.2billionthatwehadannouncedwiththerigaddsinthesecondhalfoftheyear,it'sbrokenoutabout$1.95billionindrilling;$250millionofothercapital;water,infrastructure,verticalintegrationandfacilities.Operatingcashflowof$1.5billionasImentionedalready$700millionattheendofJuly.
Andalsoifyoulookatthischart,forinstanceifwegetto$40oilandstayat$40fortherestofthisyear,weonlyloseroughlybetweenthestarand$40oiland$2.90gas,weonlyloseabout$50millionto$60milliondecreaseinourcashflow.It'sjustatremendous--sowhymakethedecisionnowbasedoncurrentprices?
I'moptimisticbythesecondhalfof2016thatpriceswillbebacktothemid-$50soreveninthelow$60swiththesecondhalfof2016.
Slidenumber7andourlong-termgrowthrate.Wearestillat15%plusfrom2016to2018,20%ontheoilgrowth.Ourguidanceforthird-quarter,asignificantincreaseupto205,000to210,000barrelsofoilequivalentperday,andwe'llbemovingfrom51%oilto60%oiloverthenextthreeyears.
I'llnowturnitovertoTimtogetmoredetailonouroperations.
T imDove (President,COO):
Thanks,Scott,andI'mgoingtostartwithslide8.AsScotthasalreadymentioned,thesecondquarterdidfeatureaverystrongdrillingcampaignintheNorthernSpraberryWolfcamparea,particularlyinthegraphshereonslide8showthatveryclearly.
Youcanseeashementioned,thattheWolfcampBwells,16intotal,areaveragingactuallywellover1millionBOEperdaysofar.Realizingyourverticalscalethere,there'salogscale.Sothesewellshavedoneexceptionallywell,andashecoveredaswell,asyoulooktotherightgraph,yourLowerSpraberryShalewellsareexhibitingprobablyabout1millionBOEtypecurve.Sothey'vedoneexceptionallywell.
Wedidputsevenotherwellsonproductioninotherzones,andthestatisticsareshownthereonslide8.Theytrackessentiallywherewe'vebeenintermsofthesezonesaswell.
Sowhenyoulookatthat,itgivesusalotofconfidencethatthedrillingwe'vedoneinthepastwillberepresentativeofwhatweexpectminimuminthefuture.
Wealsodidputonproductionsevenofour25wellcampaignoncompletionoptimizationduringthequarter,andthoseresultslookveryfavorable.Ofcourse,theyinvolvechangingthestagelengthsandtheclustersperstage,proppantconcentration,fluidpumpandsoon.Butthosesevenwellslookveryencouraging,andofcourse,itisgoingtotakemoretimeforthefullevaluation.AndIexpectthatoverthenextcoupleofquarterswe'llbecomingoutwithmoredataabouttheactualwellresults,butsufficeittosay,theylookverygoodsofar.
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Turningtoslide9.Thisshowstheprogramtodate.ResultsforalloftheNorthernSpraberryWolfcamphorizontalwellsintheAandBzones,that'snowatotalof107wells.Andsowewereshowingyouallthedataforallthewellsonaverage,andyoucanseeprettyclearlyinthetopgraphthatournumbersarecominginatorabovethemillionbarreltypecurveforalltheAsandtheBssimilarlyrunningabout1millionbarrelsBOE.
Soitdoesgiveusalotofconfidencethatwehavethisconsistencyacrossthesezonesandreallyacrossthebasin.Ifyoulookatthegraphontheright,themap,itshowsthatwehavebeendrillingtheBwellsparticularlyoveraprettywideswathofacreageandtheAs,aswell.Soitgivesusalotofconfidenceaswelookforwardthatasweheadmoretowardsdevelopmentmodeoverthenextseveralyears,we'llhaveataminimumthesekindofresultstotheextentouroptimizationcampaignissuccessful.Ithinkresultscouldeasilyoutpacewhatwe'reshowingintermsofthehistoricaldata.
Nowturningtoslide10.Aswementioned,weareintheprocessoframpingupthedrillingcampaign.Havingstarteditlastmonth,we'renowoperating10rigsintheNorth.ThatcampaignisshowingstrongEURsandreturns,mostlybecauseofthefactthatwe'vegottensubstantialcostreductionsthatScottalreadymentioned,butalsowe'redoingagreatjobasacompanyintermsofbringingoutnewefficiencies.Wearereducingourtimeonthesewells.Ourspudtopoptimes,forinstance,hasbeenreducedtoabout25days.ThathastodowithchangingthecasingdesignforthesewellsandinparticulartrailingonlytheWolfcampBprincipallyasthemainzone.Ourcrewsgetbetterandbetterastheydrilljustonezone.
We'vealsoseenreductionsinthetimeintermsofthemeasuringoffractopop,puttingthewellsonproductionbuildingdownaswell.Sowe'rejustgettingmoreefficient,we'regettingbetter,andforthatmatter,thecompletionsaregettingbetteraswell.We'rereducingtheaveragetimeittakestopumpthestages.We'rebasicallypumpingmorestagesperday.Sothat'sallgoingexceptionallywell.
Wecontinuetotestnewtechnologieswhetherit'sdissolvableplugsordiversiontechnologiesand,asImentioned,alargecampaignforcompletionoptimization.
Thewellcostsnowarecominginabout$8millionto$8.5million.That'sdown,ofcourse,andrepresentthe20%or25%costreductionorsothatwe'vealreadyachieved,andIthinkwecanactuallymovethosenumbersdownaswegetinto2016toover30%.Andthisistodowithburningoffourtubularsinventory,havingrigscomeoffcontractandactuallyincreasingsavingsalongotherparametersaswell.
Returnstothenorthlookexceptionallystrong,50%to60%basedonthosemillionBOEtypecurves.
Asyoulookatthemapontheright,theonethingthatjumpsouthereistheplannednumberofwellstoPOPthisyear.Itcontinuestobe100wells,butasyoulooktothenumberofwellstobespud,it'snowincreasedtoabout100wells.That'sassociatedwiththefactwe'reincreasingtherigcount,butatthesametime,mostofthoserigswillhavenoeffectintermsof2015production.Itwillmostlyaffect2016.
Turningtoslide11,inthesouthernJVarea,thestoryisverymuchthesame.WearenowoperatingthefourrigsintheareagettingasimilartypesofresultswhenitcomestoimprovementsinthedrillingcampaignandstrongEURs,aswellasreductionsintimeonwells.
Thewellsarealittlecheaperinthesouth,ofcourse,becausewe'realittleshallower.Theyaverageabout$7.5millionnowhaving--havetheeffectofthecostreductions.Ithinkwecanmovethosedownto$6.5millionto$7.0millionaswegetintothenextyear,againreflectingthe30%reductionsorso.
AndthesewellshaveIRRsofabout45%andmeasurethesamewayasItalkedwiththenorthernwells.AndasyoulookattheplanregardingPOPPINGwells,we'restillPOPPINGabout75to80wells.Wearewellonthewaytogetthatdone,consideringwehave58thatwe'vedonethroughthesecondquarter.And
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thenweplantospudonlyabout45wellsthisyear.That'sjustasaresultofarelativelylowrigcountinthesouthatfourrigs,whichhaslimitsineverywellwecanspud.
Goingtoslide12,thestrongdrillingcampaigninthequarterledtoaprettysignificantincreaseinproduction,about7,000barrelsaday.Asyoulookatthethird-andfourth-quarterforecasts,youseethattheyareplusorminusflattishcomparedtotwo-thirdsofourrunrate.It'llbeupinthethirdquarterbutflatinthefourth.
Thathastodowiththefactthatwereducedourrigcountlatelastyearintothefirstquarterthisyear,andaswenowpickthatup,you'llseeanincreaseinthetrajectory.SoIwouldfocusonthe2016trajectoryasbeingmoreemblematicofwhatwecandowithasubstantialnumberofrigsworking.
Ifyoulookbacktothelastthreequartersof2014,thatisthetypeofgrowthyoushouldbeabletoseeintermsofatrajectory,andwe'rebacktoafullcampaignofdrilling.SooverallitwasastrongquarterforourPermianBasinoperations.
NowIamgoingtoturntoslide13.Sincethefirst-quartercall,we'vebeenreceivingalotofinterestfromourshareholdersandtheanalystcommunityabouthowtheyshouldbethinkingaboutourshort-andlong-terminfrastructureneedsinthePermianconsideringthesizeofthis,theprospect,thesizeofthefieldisprettylargenumbers,butparticularlyregardingtankbatteriesandsaltwaterdisposalsystemsandhowtheyfitintotheequation.
Asweshowonthemaponthetoprightof13,theconfigurationthatwe'vedevelopednowoverthelastcoupleofyearsinouracreageprovidesforsignificantopportunitiesforoptimizingthisinfrastructureinacentralizedfashion.
Sowhatisshownthereonthetoprightarefoursections,each,ofcourse,640acresoratotalof2,560acres.They'relinedupinacontiguousfashionnorthandsouth,whichistheoptimaldirectionfordrilling.Andthebasedevelopmentassumptionforthesefoursections,wewillbedrilling60wellsonthreewellpads,coveringfourdifferentzonesinthatacreage.Andifyoulookattheneedsfortankbatteryandsaltwaterfacilities,theyareestimatedtobeabout$25millionintotaloverthewholedevelopmentofthisacreage,includingtheD&Ccosts.
Sotherealpointtobenotedhereisabout75%setofouracreageisamenabletothistypeofdevelopment.Sothatmeanswhatyou'llbeseeingusdoisover200ofthesedevelopmentsinthefullnessoftime.
Sothat'swhywereallyneedtogetthisrightintheupfrontistomakesurethatwehavethisdown,andwebelievewe'redoingitefficiently.Withthismassiveareathatweareworkingon,itwilltake,needlesstosay,quiteabitoftimetobuildthisout.Ithinkwewillbespendingabout$250millionto$350millioneachofthenextthreeyearsforbuildoutofthesesimilarsystems.
Asyouseeinthebottomgraph,thisdoesinvolvesomeupfrontspendingwherethefirstsixwellsareatotalofabout$10millionorabout$1.6millionfortheinfrastructure.Whilethelast54wellsaverageonlyabout$300,000.Sotheaverageforallofthe60wellscomesinatabout$400,000.
Thekeypointisthat,althoughwedohavesomefront-endloadedspending,italsoreducestheinfrastructurecapitalcostsperwellovertime.
Soturningtoslide14,thisisjustreallyareal-lifeexampleofwhatIjustmentioned.Andit'stakingplaceintheGiddingsareainthenorthernacreageoftheSouthernWolfcampJV.Thefirstsixwellsaredrilled,andfacilitieswerebuiltlastyear,andsincethen,14morewellshavebeenaddedatabout$300,000perwell.Andwe'llprobablyputabout12morewellsonproductionfortherestoftheyear.
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Sobytheendoftheyear,wewillhaveconnectedabout32wells,morethanhalfofthetotalof60,andthatwillbeinlessthantwoyears.
Andsothebottomgraphshowstheactualtrajectoryofaveragecostscomingdownaspredictedasthelast28wellsaretiedininthenextcoupleofyearsatabout$300,000perPOP.
Sogiventhatthere'saburdenassociatedwiththeupfrontcapital,whydeveloptheinfrastructurethiswaywouldbethequestion,andI'llcoverthatonslide15.
Sotherealquestionis,whatwouldbeouralternative?Themostsimplisticwaytothinkaboutthatwouldbetosetsmallertankbatteriesandsmallersaltwaterdisposalsystemstohandleeachwellasitisdrilledratherthanacentralizedapproach.Andsowe'vedonesomecalculationsastowhatthatwouldlooklikecomparedtohowwearedoingit.
Andsothequestionis,whyisourcentralizedinfrastructuremethodthepreferredwaytogo?Well,youcanseeinthetwographshereonslide15,andthatistosaywhathappenswhenyoudoitourwayisthatthetotalinfrastructurecostsforthefieldarelower.Theactualupfrontcapitalcostsarelower,andwegetthebenefitsofthreewellpadbeingmoreefficient,especiallyonacostbasis.
Inaddition,becausethethreewellpaddrillingproductionandcashflowisacceleratedanddoingitourwayalsoavoidsthelossesofpossiblefuturedrillinglocationsduetosurfacelimitations,youeatupalotmoresurfacewhenyouplaceonetankperwellthanthewaywedoit,andtheresultcanbelosinglocations.
Andfinally,itreducesthenumberofoffsetwellsthatwehavetoshutinduringcompletionsofwellsnearby.
Themostimportantfactor,though,isitincreasesournetpresentvalueoftheentireprojectbyabout$40millionforeachofthose2,560acres.Orifyoucalculateitoutonaperacrebasis,itisabout$15,000anacre.Soabout$40million,andthat'sifyoudon'tloselocations.Ifyouweretoloselocations,youcouldgain$80millionofvalue.
So,ifyoucalculatethisacrossourentireacreageposition,it'satremendousamountofvalue.Wethinkthelogiciscompelling,andthisisthebasisuponwhichwewillcontinuetodevelopthemassiveopportunitywehave.
I'daskthatifyouneedmoreinformation,feelfreetocontactFrankandtheIRteam,andIknowthey'dbehappytowalkyouthroughtheassumptionsoftheanalysis.
Letmegothentoslide16.ThisisasummaryofwhereweareregardingthePermianwatersystem.Asyouallknow,we'replanningforalong-termsolutiontoourwaterneeds,theobjectiveofwhichistoreducethecostofwaterperwellandalsotomakesurewehaveadequatewaterinthesenseofnon-potablewater.Wewanttogettothepointwherewe'renotusinganyfreshwaterifwecandoso.Thesavingsofthecostsavingsperwellissignificant,probably$500,000perwell.
Theprojectasmentionedwillcomeoninphasesoverseveralyears.Thefirstofwhichistheinitialphasewe'redoingthisyear,whichisdoingtheengineeringandright-of-way,connectingtheSantaRosabrackishwatersourcethatwearealreadyproducing.It'sabouta$70millionproject,movingwaterupfromthesouthintotheSWATarea.
Thesecondphasewearecommencinghereinthesecondhalfoftheyearandanticipatecompletingitnextyear,andthat'sbringingintheOdessawater.That'stheeffluentwaterfromthecityofOdessa;about100,000barrelsaday.Itwillbereadylaterthisyearandintonextyearandthensubsequenttowhichweneedthesubsystemsandfracpondsbuiltouttomakesurewecangetthewatertoour
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locations.
Sothetotalcostforthatprojectisabout$100million.$60millionofwhichhitsthisyearandabout$40millionnextyear.Butitwill,asImentioned,reduceourpurchaseandhandlingcostsofwaterofabout$500,000perwell.Dothemathonthat,andthat'sapayoutthatislessthantwoyears.
Turningnowtoslide17,thisslidegivesusanupdateregardingthestatusofsomeforotherinfrastructureprojects.Intermsofgasprocessing,ourinterestintheTargasystemisveryimportantbecauseitgivesusaseatatthetabletomakesurethatfutureplantsarebuiltinadvanceofourthroughputneedsinthearea.Andnotwithstandingthat,itallowsustobeconfidentthatwecangetourwellshookedupimmediatelyandreadyforproduction.It'simprovedourcontracttermssignificantly,andalso,ofcourse,webenefittotheextentthethird-partyvolumesareputthroughplantaswell.
Thisyear'sbudgethasabout$70millionnettoPioneerfortheinitialconstructionphaseoftheBuffaloplantinMartinCounty.That'sabouta200millioncubicfootperdayplantandforgatheringsystemupgrades.
Sowhatwe'veseeninthePermianBasinisbyvirtueofspendingtimeonthingslikefieldcompression,lineloopingandsoon,reducingpressuresinthefield,we'veactuallysubstantiallyincreasedgasproduction.
Ifyoutakealookatourdata,thefourth-quarterPermianBasingasproductionisabout13%oftotalproduction.Inthefirstquarter,it's15%.That'snotbecausewellsaregettingmoregassy,it'sbecausewe'regettingbetteratcapturingthegasthat'sbeingproduced,andthat'stheresultofreducedlinepressures.
Sothat'sbeenabigpositiveforus.The2016spendingshouldbesimilartothisyear,anditwillbeinessenceputinplacetocontinuewhatImentionedbutalsotofinishtheBuffaloplant.Thatplanshouldbedonelaternextyear.
Inthesandmine,ofcourse,wehavedoneworkthisyearregardingbeginningtheexpansion.We'vedonesomeofthegroundworkforthat.Wespentabout$25millionthisyearwiththeideaofmorethandoublingthesandminecapacity.Todaywereallydonotneedmoresand,butwecanseethedaywewill.
Soweputoffthecompletionoftheexpansion,itwouldbeabouta$75millionexpansionandprobablydon'tanticipateithappeninganytimebefore,let'ssay,2018orso.
Turningtoslide19thenandtheEagleFordresults,mostofourdrillinghasbeeninKarnesandDeWittCounty,someofourverybestareas.And,asaresult,wearegeneratingveryhighreturnsabout60%IRRsand1.3millionBOEEURsinthearea.
Importantly,wecontinueourdownspacingandstaggeringprograminboththeUpperandLowertargets,andthosewellscontinuetodowell.Youcanseethebottomhandgraphontherightshowingdownspacingresults.Youknowthedifferencebetweena300-footspacingversus500,andtheyareessentiallyspoton.Sothatgivesusalotofconfidencethatthisdownspacingisbeingveryeffective.
Andwewillbeanticipatingandexpectingtoincreasetherigcounttosix--fromsixtoeightearlynextyear.Wellcostshavecomedownsignificantlyabout$6.5millionnow.Rememberwestarted--firststartedupintheEagleFord,theywere$8millionor$8.5million.Sowe'vemadehugestridesthere.Butwe'vehadabouta20%costreductionalreadyandexpectover25%--wecouldgetthecostsdowntoroughlyabout$6million,wethink,byearlynextyear.Andhereweareexperimentingwithit,althoughweareintheearlydaysofusingnewcompletiontechnologiesthatIalreadymentionedregardingdiversionand
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dissolvableplugs.
Turningthentoslide19,theEagleFordresultsforthequarter.Productionwasdownslightly.Ithadtodowithacoupleoffactors.Onewasthatweputonproductionninefewerwellsthanweanticipated,mostlyduetoweather,andthenashasbeendocumented,wehadsomewellsweputonproductionlate2014thatweredisruptedthatwehadtoohighitturnsoutoftheforecastfortheir2015productionfromthisarea,sowe'rereevaluatingthat.
Soinessence,theycameinloweronproductionthanwhenwehadanticipatedintheearlyplanning.Sowe'rereevaluatingthedrillinginthatareauntilwecanunderstandwhythosewellshavecomeinatlowerrates.
Andsoasaresultofallthat,wearemovingourproductiongrowthforecastdowntojustaslightincreaseof1%to2%fortheyear.Ethanerejectioncontinues.Thisisacrosstheboard.Ethaneandpropanepricesareinthetank,andasaresult,wherewecan,wearerejectingethanethroughoutouroperations.
SoI'mgoingtostopthereandpassitovertoRichforareviewofthesecond-quarterfinancialsandhisguidanceforthethirdquarter.
RichDealy(EVP,CFO):
Thanks,Tim,andgoodmorning.I'mgoingtostartonslide20whereweshowwehadanetlossattributabletocommonstockholdersof$218millionor$1.46perdilutedshare.Thatdidincludenon-cashmark-to-marketderivativelossesof$222millionor$1.48perdilutedshare.
Andthenwealsonoteonthisslidehere,unusualitemsthataggregate$11millionor$0.08.Soadjustingformark-to-marketunusualitems,wewereat$15millionor$0.10ofearnings.Theunusualitem,thebiggestitemthatwasourpreviouslyannouncedrestructuringthatwedidintheRatonassetteamandtheclosureoftheDenveroffice.
LookingatthebottomoftheslidewhereweshowQ2guidanceversusresults,we'vetalkedaboutproduction,andwe'lltalkalittlebitmoreaboutproductioncostsinaslideortwo.
TheoneitemtonoteisDD&Acameinabovethehighendoftherangethatwehadputout,reallyresultingfromlowercommoditypriceswhichhadtheeffectofshorteningtheeconomiclifeofourproducingwells.Thisresultedinanegativepricerevisiontoprovedreserves,whichcausedourdepletionexpensetobehigherthanweanticipated.
Turningtoslide21,lookingatpricerealizations,you'llseeonthebarstherethatoilpricesduringthequarterwereup20%to$51.64.NGLpricesweredown6%to$14.03,andgaspriceswerealsodown12%to$2.37.
Whenyoulookatthetablesunderneaththosebarchartsandparticularlyatthederivativeones,you'llseethatourderivativeposition,asScottmentioned,haspaidbigdividendsfortheCompanyoverthelastnumberofquarters.Forthesecondquarter,weadded$150millionofcashforthequarterasaresultofourderivativeposition.
Turningtoslide22onproductioncosts,youcanseethatforthequarterproductioncostscameinat$11.19,down11%fromthefirstquarter,primarilydrivenbydecreasesinourbaseLOE,goodworkfromtheassetteamsandtheircostreductioninitiatives,mainlyonfuel,electricity,oilfieldsuppliesandservices,werethemajoritems.
Sointotal,weweredown,asScottmentioned,17%fromouraverageproductionLOEcostsperBOEin2014.Andthenobviouslyaproductioninadvaloremtaxeswiththedeclineincommoditypricesarealso
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downquarteronquarter.
Turningtoslide23,liquidityposition.Wecontinuetohaveanexcellentbalancesheet.Youcanseewehadnetdebtattheendofthequarterof$2.5billion.$219millionofcashonthebalancesheetthatwassupplementedbytheclosingoftheMidstreamsaleinearlyJulythatadded$530millionofcash.SoattheendofJuly,wearenowsittingatalittleover$700millionofcashonthebalancesheetandexpecttogetanother$500millioninJulyofnextyear.Plentyofliquiditywithanunsecuredcreditfacilityavailabilityof$1.5billion.Soall-in-allgreatfinancialpositionaswemoveintothesecondhalfoftheyear.
Switchinggearsandmovingtoslide24andtalkingaboutthird-quarterguidance.Productionexpectedtobe205,000to210,000BOEsperdayforthethirdquarter.Productioncostguidancehereisupslightlyfromwhereweended--cameintothesecondquarter,mainlybecauseofthesaleoftheEFSmidstreamthatwetalkedaboutinpastquartersthatwillcauseourproductioncosttoincreaseabout$0.75to$1.00perBOE.Sothat'sreflectedintheguidance.
Otherthinginguidancethat'sofnoteisDD&A,you'llseethatisupalsoreflectingthatwewereanotherquarteroflowercommodityprices,whichweexpecttohavesomemorenegativepricerevisionstoreserves.
Otherexpenseof$45millionto$55millionincludes$20millionto$25millionofstackedrigcharges.Thatisdownfromthesecondquarterof$28millionofstackedrigchargesreflectingtherigsreportingbacktowork.
Andthentheotheritemofnoteiscurrentincometaxesof$45millionto$55million.ThisreflectsthealternateminimumtaxthatwewillhavetopayassociatedwiththeEFSmidstreamsale.Wewereabletoshelterregulartax,butwewillhavesomeAMTtopay.Sothat'sreflectedinthat$45millionto$55millionestimate.
Sowiththat,we'llstopthereandopenupthecallforquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)DougLeggate,BankofAmericaMerrillLynch.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Guys,thanksforallthecolorontheinfrastructurecosts.ButIwonderifIcouldtryand--Iknowyoutriedtokindofdumbitdownalittlebit.ButIwonderifIcouldtryandaskyoutodumbitdownevenfurther?
Ifyoulookattheproportionoftotalcapital,whichisoninfrastructureinthecurrentyear,Iwanttosayitisabout30%orsomethinglikethat.Howwouldyouexpecttheproportionofinfrastructurespendingtotrendoveryourplanningperiod?Idon'tknowifthat'saneasyquestiontoanswer.
T imDove (President,COO):
Yes,Ithink--well,firstofall,ourtankbatteryandsaltwaterdisposalexpendituresaregoingtocontinueprobablyforthenextthreeyearsattheratesImentioned.Sothosearejustrequiredtostartbuildingoutthesefoursectiondevelopmentsaswecontinuethecampaign.
Asyoulookout,forexample,thegasprocessingfacilities,we'llprobablybespendingasimilaramountnextyearasthisyear,butthat'stocompletetheBuffaloplan.Wedon'thaveanyfurthergasplantsonthehorizonafterthat.SoIthinkit'ssafetosay,it'llbesometimebeforethat[70]millionorsoreoccursafter2016.
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Andthenfromthewaterplantstandpoint,IthinkthefirsttranchebeingtheOdessaprojectissomethingwe'regoingtodo,andwearegoingtocompletethatnextyear.It'sonlyasmallamountnextyearrelativelyspeaking.Afterthat,allbetsareoff.We'regoingtoevaluatewhat'sthepropernextstepbasedonhowtheconditionsareinthemarket,whatwaterneedswehave,whereweneedthewater,whatthewelleconomicslooklikeintermsofnextstepsomewatersupply.Sowecandothatratably,wecanjustdoitpiecemeal,andwecanget--holdoffalotmorecapitalonwaterifthat'swhatwechoosetodo.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Gotit.Iappreciatethat,Tim.Myfollow-upis--it'srelatedtotherigcountrelativetowhatyou'vepreviouslybeentargeting,whichwasIguesskindofgetsyoubacktowhereyouwere,asyousaid,inyourpreviousreleaseintermsofnumberofrigs.
ButI'mgoingtousean[Oxy]example,ifImay.Theyoriginallyweretargeting50rigsby2018.Andnowwhattheyaresayingis,youknowwhat,wecandothesameamountofworkwith25.We'llneverget50.Sokindofthesamequestiontoyouwith36rigsbytheendofthefirstquarter,what'sthepaceofPOPSifyoulike?AndIknowyouhaveonlyjustgivenusupthosenumbers,soit'sabitunfairtoaskwhathappensnext.
Butobviouslythereisalotofcashflowthatcomeswiththegrowthtrajectory.Sowhatisthekindofmedium-termplanbeyondthefirstquarter?Soefficiencywhatdoyougetwiththe36rigs,andwhat'stheplanbeyondthefirstquarterthroughyourplanningperiod.AndI'llleaveitthere,thanks.
Scott Shef f ie ld (Chairman,CEO):
Yes,Doug,Isortofalludeditatintheopeningslideandthenfinishingupacoupleofslideslater.Thethingwe'reseeingisthatwearebudgetingsomewherebetween28and30daystospudtoTDofthesewells,WolfcampBwells.Andsowe'vehadourlast10wellsat20;wehadoneat13.Ifwecontinuetoseethatnumbercomedown,obviously,wecandrillthesamenumberofwells,getthesameproductiongrowthwithlessrigs.
Soobviouslythatwouldhappenwithusaswell.Weneedtoseetheefficienciescontinuebeforewemakethatdecision.Obviously,we'llbeflexiblewithourbestbalancesheetandourbestsuperiorderivatives.Wehavealotmoreflexibility.Soyoumayseeatsomepointintimeusaddlessrigs.Itwon'tbebecauseofthecommodityprice.Itwillbebecausewearedrillingthesewellsin20or22daysonaverage.SoIhopethatanswersyourquestion.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Soshouldwereallythinkaboutyouatsomepointlivingwithincashflow,Scott,orhowareyoutargetingthespending,Iguess,isreallywhatI'mtryingtogetat?
Scott Shef f ie ld (Chairman,CEO):
Yes,with--I'velookedatalmostallofourpeers.Almostallofourpeersare2timesthe4timesdebttocashflow.Weareessentiallyalittleover1.Soobviously,wehavemorefirepowerthanalmostallofourpeers.Wehaveabetterhedgebook.Wehavemorecashonthebalancesheet.
Sowe'regoingtousethatcash.Wewilluseourbalancesheetsomewhattoapointgoinginto2016.Sowehavelotsflexibility.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Gotit.I'llleaveitthere,guys.Thankssomuch.
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Operator :
CharlesMeade,JohnsonRice.
CharlesMeade (Analyst-JohnsonRice):
Scott,ifIcouldjustpickupabitonDoug'squestionthere,andIknowyouguyshavebeenaskingthesequestionsalotofways.Butyouobviouslyhavethereturnsatthewellleveltojustifytheinvestment,andyou'reinthegreatpositionwithalltheserecentassetsalesthatyou'vegotarelativelyunder-leveredbalancesheetwithcash.
Butwhatistheyearthatsoundsliketheobjectivefunctionforyouguysisyou'relookingforgrowth,andI'mwonderingifthat's--ifthatistheobjectionfunction,whataretheconstraints?Inthenear-term,isthereadollaramountinexcessofcashflowthatyou'rethinkingaboutthatyou'recomfortablespending?
Andthenasthatmovesoverthetime,atsomepointwhatbecomesrelevantconstraint?Isitdebt-to-EBITDA,orhowareyouthinkingaboutthatoverthethree-yeartimeframe?
Scott Shef f ie ld (Chairman,CEO):
Yes,Imean,it'simportant--wethinkit'simportanttobringourNAVforward.It'simportanttoshowgrowthaslongaswe'rehavingverygoodreturns.Wehavestateddebttocashflowpubliclyof[1.5].Maybewegoto[1.6],[1.7]atsomepointintime.Atthesametime,wehavealotofflexibility.Wehaveobviouslyotherassetstodivestoftolookat.Andsorightnow,weseeunderthiscurrentenvironment,inthisstripenvironment,noneedtodoanythingelse,exceptexecute.
AndwethinkwillgetbetterproductiongrowththanweareactuallyshowingwiththeresultsthatwearecontinuingtoseeintheWolfcampBandtheLowerSpraberryShale.Soit'sreallygettingtogrowth.We'retargetingthe15%,butyou'vegottohavegreatreturns.Attheendoftheday,we'vestillgottohaveagoodbalancesheet.
CharlesMeade (Analyst-JohnsonRice):
Gotit.That'shelpful,Scott.AndthenifIcouldmoveontothedevelopmentpatternthatyouguyslaidoutherewiththefourstacksectionsandthe30wellsacrossasection,I'mcuriousifyoucouldelaborateabitonhowmanydifferentzonesyouseecontributingtothis30wellsacrossasection?AndIguessaskindofabackwardwayofaskingofwhatyourassumedspacinginasection,youknowthelateraloffsettothesection,arethere?Andifthere'spossibleupsidetothat--I'msorry,not60but30wellsacrossasection.
T imDove (President,COO):
Yes,Charles,thisisTim.It'sactually60wellscoveringtheentirefoursectionsdrillingbothnorthwardandsouthward,sowe'reclearonthat.AndthewayIcouchthatwasfourdifferentzones.That'sjustamodelwewouldlookattoday.
Imeanifyoulookatourwellresultssofar,it'sprettyclearthatwe'veprovenuptheWolfcampB,theWolfcampA,LowerSpraberryShale,alotofcasesintheMiddleSpraberryShale.Wehavealotofoptions,ofcourse,forWolfcampD,dependingonwhereweareandwhatistheoptimalzonetobedrillingintheareaweare.Butthisisjustonemodel.
Ifyoulookatthespacingassumptionhere,it'sabout600to660feetspacingiswhat'sassumedinthere,ifyoujustdothemath.Thatwouldn'tnecessarilybedefinitive.It'spossiblewecouldcomeinslightlyinsideofthere.
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Buttheotherthingtonoteiswehaveroominheretocomebacktootherzonesaswell.Sowe'renotlimitedtoonlyfourzones.Thisisjustthepatternwe'redrillinginwhatwewouldsaywouldbetheoptimalfourzonesinanarea.
Sowecouldcomebackanddrillotherzonesonthesameacreagepositionanddothatperhapsalittlebitlater.Youmeanyouhavetorealize,Charles,eachoftheseforsectionstakes,ifyoujustdothemath,60wellsand$8millionyou'redealingwithnearly$0.5billiontodevelop2,500acres.
Sowe'llonlygettothebestzonesfirstIguessisthewayIwouldlookatit,butwehavespacetogobacktootherzones.
CharlesMeade (Analyst-JohnsonRice):
That'shelpful,Tim.Andwhenyousayspace,ifIunderstandyoucorrectly,it'sreallyyou'retalkingaboutsurface,spaceonthesurfacepatterntocomebackinandgetthosezones.
T imDove (President,COO):
Right.Correct.
CharlesMeade (Analyst-JohnsonRice):
Right.Thankyou.
Operator :
LeoMariani,RBC.
LeoMariani(Analyst-RBCCapitalMarkets):
Justaquestionhereonthe2015overallproductiongrowth.Youguystalkedabout10%plus.Areyouguysadjustingforthedivestituresthatyouhadin2014togettothe10%plus,oristhatjustthestraightcalconthe2014productionversusthe2015production?
Scott Shef f ie ld (Chairman,CEO):
Yes,Leo,itdoesincludethosedivestituresbeingtakenout.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay.Nowthat'shelpful.AndIguessobviously,Iknowit'searlydays,butyouguysdidtalkaboutencouragingresultsfromsevenofyournewPermianwellsthatyouusedenhancedcompletiondesigns.Isit--doyouhaveenoughdatayettosayifthosewellsappeartobeperformingbetterthankindoftheexistingwellsatthispointintime?
T imDove (President,COO):
Well,ofcourse,wearenotready,Leo,togiveyouawholelotofdataonthatuntilwehavemoredefinitedata--infact,moredataonmorewells.Butsufficeittosay,wherewewouldhavebeenaveragingabout1900IPor24-hourpeakratesontheWolfcampBwells,weareeasilyseeingwellover2,000onthosewellsthatareaffectedbythecompletionoptimization.
Sowe'renotgoingtogiveyouspecificnumbers,butseeprettysignificantbumps.Andwejustneedalittlemoredata,abiggerdatasetinordertosortofcalculateaverages.ButIcantellyou,itiswellover2,000asanexamplecomparedtotheaverage.
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LeoMariani(Analyst-RBCCapitalMarkets):
That'shelpful.AndIguessyouguysalsotalkedaboutsomelonger-termassetsalestokeepthebalancesheetstrong.Wouldsomeofthemidstreaminfrastructureyou'rebuildingoutoverthenextcoupleofyearsbeacriticalpartofthat?Anyotherkindofhighlevelcoloryoucanprovidethere?
Scott Shef f ie ld (Chairman,CEO):
Leo,I'mjusttryingtoaddressthelong-termquestionifforsomereasonwewillcontinuetodowhatwehavethelastthreeorfouryearstomakesurewekeepagreatbalancesheet.Wedohavethreeotherassetsthatwecoulddivestofovertime.Therearenoplansatthecurrenttimetodoanything.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay.That'shelpful.AndIguessyouguysalsotalkedabouta900MBOEEURintheSouthernWolfcamp,whichisanicebump.Justtryingtofigureoutifthat'sthewholeSouthernWolfcamporjusttheNorthernpartoftheSouthernbeingthebestpartthere?
T imDove (President,COO):
Yes,wearedrillingmostlyinthenorth,andwhatwearereflectingonistheresultsintheNorth.
LeoMariani(Analyst-RBCCapitalMarkets):
Okay.Thanks,guys.
Operator :
MichaelHall,HeikkinenEnergyAdvisors.
MichaelHall(Analyst-HeikkinenEnergyAdvisors):
Thanks.Goodmorning.Congratsonagoodupdate.Justcurious,asyoupushontherigrampplan,youknowyou'vebeenfocusedonsingleintervalhere,moresowiththeWolfcampB.Doesthatfocuschangeasthisrigrampescalates,andhowdowethinkaboutkindofmaintainingtheefficienciesyou'veseensofarasyoukeeppressingonthegasbill?
Scott Shef f ie ld (Chairman,CEO):
Yes,Ithinkovertime,Michael,you'llseeusdosomeAs,sprinkleinsomeAsinLowerSpraberryShales.Weareseeinggreatresultsfrombothalso.Butweobviouslydon'twanttosacrificeourefficiencies,buthopefullytheAsandtheLowerSpraberryShalescanbedrilledthesameamountofdrillingspudtimeaswe'reseeingintheWolfcampBs.
MichaelHall(Analyst-HeikkinenEnergyAdvisors):
Okay.Andthenonthecentralizedfacilityversussinglewellcasethatwashelpfulcasestudiestolayoutforus,justtomakesureI'mclear,areyoubuildingoutthefacilitiesforall60wellsinitially,oristhat--arethoseinkindofmodularpieces?
T imDove (President,COO):
Whatwedo,Ikindofmentionedthis,Michael,whenIwasgoingthroughthoseslidesisthatwebuildout,firstofall,atechbatterythat'sarelativelylargetankbatterytohandlethefirstsixwells.Inadditiontowhichwethencomebackinonindividualwellsandputinseparationandbasicallyproductionlines,andthat'ssubstantiallylower.
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Soafterthefirstsixwellsareputin,wehaverelativelylowercapitalgoinginactuallyprobably$300,000perwelljustforseparationandproductionfacilities,asopposedtothe$10millionupfronttogetthefirstsixwellson.
MichaelHall(Analyst-HeikkinenEnergyAdvisors):
Gotit.Thatmakessense.Okay.That'shelpful.AndthenIguessit'sbeentouchedonalittlebitintermsofpotentialsourcesoffuturecapital,butinthecontextofthecentralizedfacilities,youhadmentionedthatmaybe75%oftheacreagewasamenabletothatsortofdevelopment.Iamjusttryingtothink,iftheother25%isn'tatastructuraleconomicdisadvantagerelativetothewholeinventoryand,therefore,mightbe--youmightbewillingtothinkaboutmonetizingsmallpiecesoftheacreagethatdon'tfitinaswellfromacontiguousstandpointorsomeothercharacters.
Scott Shef f ie ld (Chairman,CEO):
Michael,weare--firstofall,we'retryingtoblockinthroughsmalldeals,transactionsandgetcontiguoustractsthroughacquisitions.We'vebeenaveraging$20million,$25million,$30millionayearthelasttwoorthreeyears,andwewillcontinuetodothatatverylowacreagecosts.
Yourbiggerpicturequestion,we'vealwaysbeenopen,andthat'sanothersourceofcapitalislookingatsellingaportionofourfringeacreage.Thetransaction,there'sbeenthreetransactionsthatIhaveseenoverthelast90daysthatpeoplearecontinuingtopay$30,000to$35,000peracreingoodtieroneacreage.Soifwecangetthosetypeofprices,thatisanothersourceofcapitalthatwewouldbewillingtolookat,besidesdivestingofourthreeassets.
MichaelHall(Analyst-HeikkinenEnergyAdvisors):
Great.That'shelpful.Itcertainlyseemstomakesense.AndthenonthegreatLOEimprovement,isthatsortof2Qlevelsustainable?Justkindofmodelingtechquestion.
RichDealy(EVP,CFO):
Yes,sustainableotherthanfortheincreasefromtheEFSmidstreamthatwetalkedaboutthatwilllosethebenefitofthatcashflow.Soitwillbe,likeIsaid,a$0.75to$1.00bump.
T imDove (President,COO):
Andtheotherthingthat'shappenedtherewithelectricity,ofcourse,iswearetendingtogomoretowardsgaslift,whichisaprettysignificantcostsaver.
MichaelHall(Analyst-HeikkinenEnergyAdvisors):
Okay.That'sallIhad.Thanks.Iappreciatethetime.
Operator :
JohnFreeman,RaymondJames.
JohnFreeman (Analyst-RaymondJames):
Youpreviouslytalked,Scott,abouthowyouwerelookingat28,30daysspudtoTD,andnowyougottheserecentwellsatmorelike20days,andobviouslytheonethatwas13days.IfIlookatkindofalittlebitdifferentangle,ifIlookmorejustkindofspudtoPOPtimesandlookatyourpreliminarygrowthguidancethatyouhavegivenforkindof2016/2018timeframe,doesthatassumethatthespudtoPOPtimesinthePermian,forexample,juststayinthekindof142to160dayrange,ordoyouinthatkindof
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preliminaryguidanceassumeadditionalefficiencygains?
Scott Shef f ie ld (Chairman,CEO):
No,no.It'sstillassumingthe140to160timeframe.Justthatthedrillingiswhatwe'reseeingthequickerefficiencygains,andobviouslyyouendupspendinganddrillingalotmorewells,spendingmorecapitalifyoucandrillthesewellsin20daysversus28to30days.Sothat'swhywe'rewatchingthatpiecealotcloser.
JohnFreeman (Analyst-RaymondJames):
Okay.Andthenjusttheonefollow-upformewhenwelookatkindofthecurrentwellcostsandIguessrightnowjustlookintheNorthernareaatthe$8millionto$8.5millionandthegoaltogetitdownkindof$7.5millionto$8millionbyearlynextyear,itseemslikeagoodbitofthatyou'vebridgedalmostjustbyitselfatleastifthenumbershaveheldforwhatyouallpreviouslysaidabout$300,000awellinsavingsjustonthedissolvableplug.Isthereanotherkindofbig-ticketitemlikethat,oritismorejustfromthatpointjustefficiencygains?
T imDove (President,COO):
Yes,Iwouldtapthebrakesonthatbeingthedissolvableplugtechnologybeingthatwhichwecouldcalculateacrossalltheacreage.Wereallytestingthat,John,injustahandfulwells.Ithinkitreallyhasmoretodowiththefactthatwhenweranthebigrigramp-uplastyear,webuiltaprettysubstantialtubularsinventoriesthatwearejustburningoff.
Wecertainlyburnitofffasterwiththerigcountincreasing.ButIdon'tanticipatereallybeinginthemarketforalotmoretubularsuntilwegetrightattheendoftheyearandintonextyear.Thosetubularsaregoingtocomein25%lessthanwheretheywere.Sothat'skindofinthebagintermsofacostreductionwecancountonthat'snotincorporatedinthenumberstoday.
Thesecondthingthathappens,especiallyaswegetinto2016,iswehaverigscomingoutofstackoffcontract.Andtotheextentthosewerereplacedwithspotrigs,thosewereeasily20%savingsintermsofspreadrates.Andwe'renotseeingthattoday,asyouknow,becauseweare,infact,takingrigsrightoutofthestockattheoldrate.Andsoaccordingly,thesethingsarekindofinthebag.Ithinkwecouldsaywithalotofconfidencethosearecoming.We'vejustgottogetthefullnessoftimebehindus,andwe'llseethosecostreductions.
JohnFreeman (Analyst-RaymondJames):
Great.Thanks,guys.Appreciateit.
Operator :
BrianSinger,GoldmanSachs.
BrianSinger (Analyst-GoldmanSachs):
Lookingatslides8and9,canyoutalkinmoredetailaboutthe16WolfcampBwellsthatyoubroughtoninthequarterthatgotverysubstantiallyabove1millionBOErates?Iguesssixofthemlookedliketheyweretheresultsofthecompletionoptimizationprogram,butcanyouaddsomemorecolorontheotherswhetherthereareregionalsweetspots,whereonthemappage9theywere,iftheywereconcentratedortheywereequallyspreadout?
T imDove (President,COO):
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Ithinkyouseekindofastatisticalresultthatyouexpect.Youseesomeparticularwellsinthesameareasdoingbetterthanoffsetwellsandviceversa.SoIdon'tthinkthere'sanythingparticular.
Ithinkwhatwecansayis,andScottreallyalludedtoit,theSaleRanchareaupinMartinCountyhasgottenreallysomesimplyoutstandingresults,manyofthosewellswellover2000BOEperday.
OurHuttareacontinuestoproducewellandwiththewellsproducingona24-hourbasisintheneighborhoodofanaverageof,say,1,600or1,700barrelsaday.Soitisstatistical,buttherearecertainareaslikeSaleRanchwhicharereallyoverperforming.
BrianSinger (Analyst-GoldmanSachs):
Great.Thanks.Thenbacktothefirstquestiononwhathappensifyou'redrillingdaysfallandyou'releftwiththedecisionofwhetheryouwanttocompletemorewellswiththesamerigcountsandspendalittlebitmoremoneybutthengrowmoreversusdroprigs,samewells,samegrowth,howdoyouthinkabouthowtomakethatdecision,andwhatmetricsdoyoulooktotosay,youknow,let'skeepourrigcountandgrowmoreversuscutCapEx--orI'msorrymaintainCapExanddroprigs?
Scott Shef f ie ld (Chairman,CEO):
Yes,Brian,wearefocusedonthe15%productiongrowthnumberattheendofthedaytohaveagreatbalancesheet.Sothosearethetwodrivingalongwithobviouslygettinggreatreturns.
Sothosearethedrivers.Soifforsomereasonwehaveachoicetogoto20%to25%productiongrowthandspendalotmoremoney,takemorebalancesheetrisk,we'llprobablynotdothat.
T imDove (President,COO):
Iwouldkindofaddtothat,Scott,bysaying,toaddrigs,whatwearedoingistakingthemoutofstack,Brian.We'renotaddingnewcontractsandrigs.Andso,therefore,iftherigswehaverunningarewaymoreefficient,youjusttakelessrigsoutofstack.That'swayIthinkaboutit.
BrianSinger (Analyst-GoldmanSachs):
Gotit.Andisitfairtosaywetaketheamountofproductionyouhavehedgeddividedbythe75%thatyou'rebasicallyguidingtowardstheplusoremphasisontheplusinyourguidancefornextyear?
Scott Shef f ie ld (Chairman,CEO):
Wehaven'tgivenout2016guidance,butIthinkoverthethree-yeartimeframe,itcouldbeaplus,obviously,withtheefficienciesandeverythingelse.Butatthesametime,wearenotgoingtopushthe15%number,especiallywiththesetypeofcommoditypricesandthesetyperisksuntilthingsreset,supply/demandresetsworldwide.
JohnFreeman (Analyst-RaymondJames):
Great.Thankyou.
Operator :
MikeKelly,GlobalHunterSecurities.
MikeKelly(Analyst-GlobalHunterSecurities,LLC):
Thanksforgettingmeinhere.Curious,youknow,Leokindofalreadyhitonthis,butwe'dliketogetyourthoughtsonthelonger-termstrategywiththeseinfrastructureandassetsinthePermian,andwhyorwhy
CompanyName:PioneerNaturalResourcesCoCompanyTicker:PXDSector:BasicMaterialsIndustry:Energy
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notthesewouldultimatelybegoodassetstomonetizepotentialtiming,whatwouldmakesense,andthenjustspecifically,curiousifinyouropinion,thesetankbatterieswouldbeagoodfitforanMLPportfolio?Thankyou.
T imDove (President,COO):
Mike,thisisTim.Ithinkstartingwiththetankbatteries,thetankbatteriesandsaltwaterdisposalsystemsarereallypertinenttothewells,andtheyareoneandthesameessentially.SoIdon'tseethatatallasbeingthefuturecandidate.
However,whenyoustartlookingatsomeofourotherinfrastructureprojects,thiswouldincludesands.Itwouldincludewater.Itwouldpotentiallyincludegasprocessingfacilities.Theycouldtheoreticallybecandidates.Therealquestion,forexample,ingasprocessingisthatwecouldbenefitalotfromhavingaseatatthetable.Youcanreferbacktomycommentsonthat.
Andsototheextentweneedtobuildoutmore,havingtoseethetablesarepositive,andwhenwefeellikeit'stherighttime,thatwouldbeanexcellentcandidate.Ithinkwewouldalsosaythataboutthewatersystemandthesandmine,realizingthatneitheroneofthosehavebeenexpandedyetand,asaresult,arenotyetattheirpeakEBITDA.
SogiventhefactthatthoseareprobablysellablebasedonthemultipleEBITDA,itwouldn'tmakesensetodoittoday.
Soonethingwewanttomakesureisthesethingsdogetbuilt.Theygetbuiltonourtimelinewithourflexibility.Theexamplesofthewatersystem,wecanslowitdownasmuchaswewanttointhefaceofthesituationwherewehavelowcommodityprices.Andsowehavealltheflexibilityintheworldtomakethosedecisionsandgoasfastorasslowasweneedto.That'strueofthesandmineaswell.Sowewanttomaintainthatcontrol,especiallywhenwehavethekindofvolatilitywe'vegot.
MikeKelly(Analyst-GlobalHunterSecurities,LLC):
Okay.Fairenough.AndTim,maybeswitchinggearsherealittlebit,butontheenhancedcompletionfront,IthinkifyougoacrosstheindustryhereindifferentbasinsandeveninthePermian,youhaveseenprettystaggeringupticksintermsofwhatultimatelyyouaresortofprojectedtobeatwithanenhancedcompletionprogram.Andit'snotexactlyclearintermsofwhatisapplestoapplesforcomparingwhatthebasereferencepointis.
ButIwashopingyoucouldgivesomecontextonthat.Areyouguys--arethesereallyverybigchangesintermsofwhatyou'redoingonthecompletionsidehereversuskindofthebasecasestandardcompletion,orisitmoreonthat?Isitjustmodestuptickintermsofultimateexpectationsversus[conch]ontheothersideofthebasintalking,about60%to70%upticksand180dayrates?Maybejustprovidesomecontext.Thanks.
T imDove (President,COO):
Ithinkthefirstanswertothatquestionisit'stooearlyforus.We'vegotsomuchworktodointermsofoptimization.Thisisnottrue,notjustonlythis25wellcampaign,aswelooktothefuturewithallthesezones.Ofcourse,theyallbehavedifferentlyundercompletionandsoon.Sowe'vegot--wehavealaboratorythatwillbeworkingforalongtimeonthisquestion.ButIthinkthemostsimplestwaytodealwithitisanecdotallyandlookingfromthestandpointatourbestanalog,whichisEagleFord.
AndEagleFord,ofcourse,wepublicizedasimilarprogramwherewecouldprettyeasilydocumentsimplybecauseyou'redealingwith300footofshale.Anddependinguponwhicharea,anywherebetween15%and30%increasesinEURinasituationwherebecausetheincreasedcompletionat5%to10%capital
CompanyName:PioneerNaturalResourcesCoCompanyTicker:PXDSector:BasicMaterialsIndustry:Energy
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costbump.Sothat'sEagleFordshale.
Weweresuccessfulthere.Ianticipateusbeingsuccessfulhere.
Buttogiveyouanexactnumber,it'sjustwaytooearly.ButItoldyou,weareencouragedandgaveyouacoupleofnumberstosay,weareseeingrateswhichareindicativeofsubstantialbumpsintheEURsifyoubelievethatthereisastrongcorrelationbetweenproduction,especiallyearlyproductioninEURs,whichwedo.
MikeKelly(Analyst-GlobalHunterSecurities,LLC):
Great.Thanks,Tim.Goodupdate,guys.
Operator :
NealDingmann;SunTrustRobinsonHumphrey;Analyst
NealDingmann (Analyst-SunTrustRobinsonHumphrey):
IknowmostofyourplanisprettywellsetasfarastherigsyoumentionedinthePermadded.Iguessjustmyquestionis,ifyouhavesomeofthesuccessoverintheEagleFord,particularlywithsomeofthisUpperEagleFordpotential,anythoughtsaboutwouldthatchangeanyplansforpotentiallyin2016,orareyouprettywellsetnowwiththe12rigscomingoninthePermandwhatyouhavegoingonintheEagleFordirrespectiveofresults?
T imDove (President,COO):
Nonethatisirrespectiveofresults.Imeanwearegoingtolookathowthewellsperform,andEagleFordwehavehadquiteexcellentresultsasImentioned.Ofcourse,rightnow,wearesortoftargetinginonthetworigadd,andthatwillbefocusedonbothUpperandLowertargets,aswellthestaggeringandspacingconcept.Butthat'sbecausewe'redrillingexcellentwells.
Ithinkwe'llalwaysbeinthebusinessofallocatingcapitaltothebestreturnsiswhatitamountstoregardlessofthebasin.
NealDingmann (Analyst-SunTrustRobinsonHumphrey):
AndtheninthatEagleFord,justsoI'mclear,areyougoingtobedrillingsomeUpperandLoweronthesamepadsandthatwillfurtherimprovethecostsonsomeofthose?
T imDove (President,COO):
Yes,that'sright.
NealDingmann (Analyst-SunTrustRobinsonHumphrey):
Okay.Verygood.Thankyouall.
Operator :
RobertChristensen,ImperialCapital.
RobertChristensen (Analyst-ImperialCapital):
Yes,myquestionis,whynotdomoreintheLowerSpraberry?It'slessdepthandprobablylesscostinthisenvironment.Andyou'vehadsomeverygoodwellsthisquarter,amaterialuptickfromwhatyoudrilledinthesecondhalflastyearthere.Sothat'squestionone.
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T imDove (President,COO):
Yes,Ithink,ofcourse,IthinkScottalreadymentionedthattoyouthatwherewereallyhadnotanticipateddoinganyLowerSpraberryShalewellsthisyear'scampaign,Bob,willbemostlyjustbecauseofwantingtosticktothezoneswhichwereverypredictable.ThemoreweseetheLowerSpraberryShale,themoreexcitedweget.
Infact,ifyoutakealookatthisyear'scampaignof100wellsthatwenowplantospud,that'supfromtheearliercampaignbecauseofthenewrigs.About10%ofthosewill,infact,beLowerSpraberryShales.
Andsoyes,Iwouldagreewithyou,LowerSpraberryShaleisgreat.Itcalculatesushavingthemostoilinplaceofanyofthesezones.Ifanything,itiscomplicatedbythefactyou'vegotoffsetverticalwellsintheareathatneedtobeconsidered,butoveralltheproductivitylooksquiteoutstanding.
RobertChristensen (Analyst-ImperialCapital):
Mysecondquestionis,Iguess,highlevel.Soyou'regoingtobecapablewith18rigsasoftheendofthefirstquarterof2016togrowatthese20%growthratesthrough2018.Withoutincrementalrigs,wedrawalineendofthequarter,ofthefirstquarterof2016,andwearegoingtobecapableofgrowingat20%plusoilthrough2018.
Scott Shef f ie ld (Chairman,CEO):
That'scorrect.
RobertChristensen (Analyst-ImperialCapital):
Okay.Andtotackontothat,doyouhitaskatevelocity?Inotherwords,provideenoughcashflowoffthefirsttwoyearsofthisefforttolivewithincashflowundersortof$60oil,whichIthinkisthestripoutin2018.Dowehitsortofaskatevelocity?
Scott Shef f ie ld (Chairman,CEO):
Yes,ifitgetsupto$60andstaysthere,weareintremendousshape,Bob.Sowitha30%dropincosts,a$60oilpriceenvironment,you'llseesignificantgrowthcomingoutofPioneer.
RobertChristensen (Analyst-ImperialCapital):
Butwithincashflowin,let'ssay,livingwithincashflowinlike2019,Irealizetherearesomanymovingpartshere.ButIthinkifwe(multiplespeakers)feelcomfortable--
Scott Shef f ie ld (Chairman,CEO):
Yes,probablybytheendofthethreeyears,wewillprobablygettoneutralcashflowinthattypeofenvironmentwiththewellcostsstayingdown30%plus.
RobertChristensen (Analyst-ImperialCapital):
Excellent.Thankyouverymuch.
Operator :
PaulSankey,WolfeResearch.
PaulSankey(Analyst-WolfeResearch):
CompanyName:PioneerNaturalResourcesCoCompanyTicker:PXDSector:BasicMaterialsIndustry:Energy
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Appreciatethedetail,andthisisinmanywaysafollow-onquestion,eventothepreviousoneabouthigh-levelstrategy.Youknowlisteningtoyou,Iwasremindedabouttheoldjokeabouttwohuntersmeetingabear,andtheoneguysays,youcan'toutrunabear.Andtheotherguysays,no,butIcanoutrunyou.
AndIguesstheideaofmyquestionis,atthehighestlevelstrategy,doyouseeyourselvesaspartoftheglobalmarketsharewarthatwe'reseeingintheindustryandthatyou'rejustgoingtooutrunitandsurviveit?Oristheaimheretosortofgrowthtothepointwhereyoushowwithinfinancialreasonyourlong-termpotentialissosignificantthatyoucansellPioneertoahigherbidder?
SoIguessI'multimatelyasking,whydon'tyoupursuemoreofareturnstrategythanagrowthstrategythisyear?
Scott Shef f ie ld (Chairman,CEO):
No,numberoneisareturnstrategy.Sowestatedwe'regetting45%to60%returnsatthestripprices.Sothat'sthenumberonedriver.TheseconddriveristobringourNAVforward,anditjusthappenstoget--wegetsubstantialgrowthwiththat.Atthesametime,maintainingagreatbalancesheet.
So,wethink--IpersonallythinkshaleoilwilloutsurviveLNGprojectsaroundtheworld.Itwillsurvivenewexplorationproject.ItwillsurviveessentiallyallothershaleplaysUSintheMidlandBasin,andsotheworldneedsthePermianBasin.
Soeventuallysupply/demandisgoingtoreset.Andthelongeritstayslower,oilpricesaregoingtobouncebackevenquicker.It'sgoingtobeveryvolatileoverthenextseveralyears.Sothat'sthefocusoftheCompany.
PaulSankey(Analyst-WolfeResearch):
Yes,that'sjustaveryclearandsimpleanswer.SoIguessyouareultimatelypartofthemarketsharewarandyou'regoingtorunfasterthantheLNG,Hunterandeveryoneelseoutthere?
Scott Shef f ie ld (Chairman,CEO):
That'sright.
PaulSankey(Analyst-WolfeResearch):
Great.You'veansweredit.Thankyou.
Operator :
Andladiesandgentlemen,thisdoesconcludeourquestion-and-answersessionfortoday.I'dliketoturntheconferencebackovertoScottSheffieldforclosingoradditionalcomments.
Scott Shef f ie ld (Chairman,CEO):
I'llprobablyjustaddagoodclosingremarksoonthatlastquestion.So,again,lookforwardtoseeingeverybodyontheroadandhaveagreatlastmonthofthesummertime,andwe'llseeyouinSeptemberwiththestartupoftheconferences.LookforwardtoseeingeverybodyinNovembertoreportournextquarter'sproduction.
Thankyouverymuch.
Operator :
CompanyName:PioneerNaturalResourcesCoCompanyTicker:PXDSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:18.42BPriceasofEventDate:125.6
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Andladiesandgentlemen,thisdoesconcludetoday'sconference
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