Pioneer's Permian pathway to 1 million boe/d
In its Q4 earnings call, Pioneer Natural Resources guided to one million barrels equivalent per day (70% oil) by 2026 and pledged cash flow neutrality in 2018. Sounds great, but is it doable? In our latest report, our analysts discuss how and if Pioneer can achieve this ambitious goal.
We revisited our production model — which projects 537,000 boe/d by 2026 — and examined what Pioneer needs to do to meet its target. Homing in on oil production, the company essentially announced a 700,000 b/d crude target for 2026, but Pioneer produced just 133,000 b/d in 2016. By 2026, this production base will have declined by over 80%. Consequently, nearly all of the 700,000 b/d target needs to be from new drill volumes. If Pioneer can tackle four key issues, we estimate that the company will be well on its way to 1 million boe/d.
First, the company will need to transition fully to long laterals and V3 completions. Our base case for the company's northern Wolfcamp position assumes a per-well EUR of 800,000 boe, but a full transition to two-section laterals with high-intensity completions raises our per-well expectations to 1 million boe.
Second, the company will need to add just one rig per year. At first glance, it might look like massive rig additions will be necessary, but that's not the case. Our models indicate that adding just 10 rigs over the next decade will be enough to reach the target. Average spud-to-spud times in the Midland basin have fallen by over 30% since 2014, so Pioneer's existing 18-rig fleet can accomplish what it would have taken 25 rigs to do circa 2014.
Third, Pioneer will need to increase drilling efficiency by 2% per year. While the industry as a whole has increased efficiency through faster penetration rates, the next improvement will come from a full transition to pad development, which can decrease spud-to-spud times by more than 10%. We project that a 2% increase in efficiency per year is likely, but if Pioneer falls short for any reason, then further rig additions will be necessary to meet production targets.
Finally, increasing per-well recoveries will help Pioneer reach its target. One of the hottest discussions in tight oil is whether operators can continue to improve per-well recoveries as rig count ramps up. Second-tier equipment, drill locations and "cold" crews all work against continued productivity gains. However, we expect technological advancements and information sharing to offset these headwinds. Earlier in the year, we predicted average productivity improvements for 2017 to be between 1% and 4%. Pioneer needs to continue to be at the head of the pack to hit its lofty goal.
Hitting the target is still far from certain. Historically, adding rigs while improving efficiencies and increasing productivity has been difficult, and Pioneer has the added challenge of matching drilling growth with an increase in contracted takeaway capacity. However, if the company falls short on efficiencies and productivity, it can always compensate by introducing a bigger rig fleet or growing inorganically. While this is a lofty goal and an eye-popping number, we think Pioneer has the foundation in place to hit its target.