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Pioneer Natural Resources Third Quarter 2020 Results

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   |    Wednesday,November 04,2020

Pioneer Natural Resources Co. reported its Q3 2020 results.

Pioneer reported a third quarter net loss attributable to common stockholders of $20 million, or $0.12 per diluted share. These results include the effects of noncash mark-to-market adjustments and certain other unusual items. Excluding these items, non-GAAP adjusted income for the third quarter was $26 million, or $0.17 per diluted share. Cash flow from operating activities for the third quarter was $391 million.

Highlights:

• Delivered strong third quarter free cash flow¹ of $131 million

• Averaged third quarter oil production of 201 thousand barrels of oil per day (MBOPD), at the top end of guidance

• Averaged third quarter production of 355 thousand barrels of oil equivalent per day (MBOEPD), near the top end of guidance

• Reported capital expenditures² of $291 million during the third quarter

• Announced definitive agreement to acquire Parsley Energy, Inc. (Parsley)

President and CEO Scott D. Sheffield stated, "Pioneer continues to execute at a high level and delivered another strong quarter, generating $131 million of free cash flow¹. For the second consecutive quarter, Pioneer increased our 2020 production guidance while keeping capital guidance unchanged, driven by strong operational efficiencies and cost reduction efforts. We continue to improve cash margins, with controllable cash costs being reduced by 25% this year when compared to 2019. Pioneer's investment framework will be further strengthened in 2021 through our pending acquisition of Parsley Energy. We expect this highly accretive transaction to reduce our reinvestment rate to a range of 65% to 75%, allowing for significant free cash flow generation while maintaining a strong balance sheet. We believe these factors, in addition to our maintenance capital breakeven WTI oil price being in the low thirties, which includes coverage of the base dividend, position Pioneer as the premier independent energy investment."

Financial Highlights

• Pioneer maintains a strong balance sheet, with unrestricted cash on hand at the end of the third quarter of $1.3 billion and net debt of $2.0 billion. The Company had $2.8 billion of liquidity as of September 30, 2020, comprised of $1.3 billion of unrestricted cash and a $1.5 billion unsecured credit facility (undrawn as of September 30, 2020).

• During the third quarter, the Company's drilling, completion and facilities capital expenditures totaled $277 million. The Company's total capital expenditures², including water infrastructure, totaled $291 million.

• Cash flow from operating activities during the third quarter was $391 million, leading to free cash flow¹ of $131 million for the quarter.

Financial Results

For the third quarter, the average realized price for oil was $39.22 per barrel. The average realized price for natural gas liquids (NGLs) was $16.93 per barrel, and the average realized price for gas was $1.74 per thousand cubic feet. These prices exclude the effects of derivatives.

Production costs, including taxes, averaged $6.89 per barrel of oil equivalent (BOE). Depreciation, depletion and amortization (DD&A) expense averaged $12.04 per BOE. Exploration and abandonment costs were $16 million. General and administrative (G&A) expense was $64 million. Interest expense was $34 million. The net cash flow impact related to purchases and sales of oil and gas, including firm transportation, was a loss of $63 million. Other expense was $98 million, or $9 million excluding unusual items³.

Operations Update

Pioneer continued to see strong efficiency gains during the third quarter, enabling the Company to place 37 horizontal wells on production despite lower activity levels earlier in the year. During the first nine months of 2020, drilling operations averaged approximately 1,150 drilled feet per day and completion operations averaged approximately 1,800 completed feet per day, surpassing our strong results for the six months ended June 30, 2020. Pioneer's well costs continue to benefit from these efficiency gains, leading to additional cost reductions during the quarter of approximately $250 thousand per well, or a reduction of approximately $2 million per well when compared to the Company's original 2020 budget. The trend of lower well costs continues to significantly improve capital efficiency. Pioneer expects approximately 60% of the achieved well cost savings this year to be sustainable through commodity price cycles.

The Company's controllable cash costs, inclusive of lease operating expense, G&A and interest expense, continue to trend lower and represent an approximately 25% reduction per BOE in 2020 when compared to 2019. Pioneer's improved cost structure continues to drive strong margins and provide incremental cash flow. Cash flow is forecasted to improve even further once the pending acquisition of Parsley is completed, and the Company begins to realize the expected annual synergies associated with the acquisition of approximately $325 million.

The Company continues to proactively curtail lower-margin, higher-cost vertical well production in the current commodity price environment, benefiting operating costs. Pioneer curtailed approximately 5.5 MBOPD of net production during the third quarter and expects the same amount to remain curtailed in the current commodity price environment. The majority of the vertical wells associated with this production are expected to be plugged and abandoned and are not expected to return to production. Decisions to curtail production are economically driven and evaluated on a well-by-well basis.

Full-Year 2020 Update

The Company is maintaining its 2020 drilling, completions and facilities capital budget range of $1.3 billion to $1.5 billion, with an additional approximately $100 million budgeted for Pioneer's differentiated water infrastructure, resulting in a total 2020 capital budget² range of $1.4 billion to $1.6 billion.

Pioneer is increasing its guidance for 2020 oil production to a range of 209 to 211 MBOPD and total production range of 365 to 369 MBOEPD. The Company continues to monitor the fluid macroeconomic environment and will remain flexible and responsive to changing market conditions to preserve its strong balance sheet.

The Company is currently operating eight horizontal drilling rigs and four frac fleets. The operated drilling rigs include one horizontal drilling rig in the southern joint venture area and one horizontal drilling rig associated with Pioneer's nine-well DrillCo agreement in the southern joint venture area. Pioneer will continue to evaluate its drilling and completions program on an economic basis, with future activity levels assessed regularly and governed by its reinvestment framework.

Pioneer has redefined its investment proposition to prioritize free cash flow generation and return of capital. This capital allocation framework is intended to create long-term value for shareholders by optimizing the reinvestment of cash flow to accelerate the Company's free cash flow profile. The acquisition of Parsley is expected to reduce the reinvestment rate from a range of 70% to 80% to a range of 65% to 75%, enhancing the value proposition for shareholders through increased free cash flow generation. Pioneer is targeting a 10% total annual return, inclusive of a strong and growing base dividend⁴, a variable dividend⁴ and high-return oil growth. The Company believes this differentiated strategy will position Pioneer to be competitive across sectors.

Pioneer continues to maintain substantial oil derivative coverage in order to protect the balance sheet, providing the Company with operational and financial flexibility. The Company's financial and derivative mark-to-market results and open derivatives positions are outlined in the attached schedules.

Fourth Quarter 2020 Guidance

Fourth quarter 2020 oil production is forecasted to average between 197 to 207 MBOPD and total production is expected to average between 355 to 370 MBOEPD. Production costs are expected to average $6.25 per BOE to $7.75 per BOE. DD&A expense is expected to average $11.75 per BOE to $13.75 per BOE. Total exploration and abandonment expense is forecasted to be $5 million to $15 million. G&A expense is expected to be $56 million to $66 million. Interest expense is expected to be $35 million to $40 million. Other expense is forecasted to be $20 million to $30 million, excluding stacked drilling rig fees, idle frac fleet fees and other fees associated with reduced activity levels. Accretion of discount on asset retirement obligations is expected to be $2 million to $5 million. The cash flow impact related to purchases and sales of oil and gas, including firm transportation, is expected to be a loss of $40 million to $80 million, based on forward oil price estimates for the quarter. The Company's effective income tax rate is expected to be less than 21%. Cash income taxes are expected to be nominal.

Environmental, Social & Governance

Pioneer views sustainability as a multidisciplinary focus that balances economic growth, environmental stewardship and social responsibility. The Company emphasizes developing natural resources in a manner that protects surrounding communities and preserves the environment.

Pioneer is focused on reducing emissions and emission intensities. Between 2016 and 2018, the Company's greenhouse gas (GHG) emissions have been reduced by 24%, total GHG emission intensity has decreased by 38% and methane intensity has declined by 41%. Additionally, between January 2018 and July 2019, the Company was able to limit Permian flaring to less than 2% of its produced gas, one of the lowest flaring percentages in the Permian Basin. The Company's proactive measures, including monitoring 100% of its Permian facilities aerially for leak detection and repair and only producing a well once it is fully connected to a gas line, help to make Pioneer a leader in environmental stewardship.

Socially, Pioneer maintains a proactive safety culture, supports a diverse workforce and inspires teamwork to drive innovation. The Board of Directors has a Health, Safety and Environment Committee and a Nominating and Corporate Governance Committee to provide director-level oversight of these activities. These committees help to promote a culture of continuous improvement in safety and environmental practices.