Pioneer Cuts Capital Spending by Shocking 45%, But Still Projects 10% Increase in Oil Production

02/11/2015 5:29 pm EST

Focus: ENERGY

Jim Jubak

Founder and Editor, JubakPicks.com

Even though this oil and gas company announced plans to cut capital spending, it projects that oil production will increase in 2015, and MoneyShow's Jim Jubak points out that it expects almost all of it to come in the first half of the year.

Fourth quarter results and 2015 guidance from Pioneer Natural Resources (PXD) yesterday, February 10, pretty much sum up the near term problem for oil prices.

The company announced that it would cut its capital spending budget for 2015 by 45% from 2014 levels. Even so, the company expects that production of oil and oil equivalents will grow in 2015 by 10% on an organic basis and 20% overall.

Yep, the US oil shale industry continues to cut spending and reduce rig count, but to show significant increases in production in 2015. (The results reported by Pioneer are a big reason that the drop in the US rig count to 1,140-for the nine weeks ended February 6 (reported by Baker Hughes) for the lowest count since 2011-isn't as important as it seems when it comes to finding a bottom for oil.)

The most interesting piece of news in the Pioneer Natural Resources fine print, however, is that the company expects almost all of its increased production to come in the first half of 2015. That's a point in favor of those who argue, as I do, for a sustainable recovery in oil prices in the second half of 2015.

For the fourth quarter, Pioneer Natural Resources reported earnings of 80 cents a share, 12 cents a share below Wall Street expectations. Revenue grew by 74.5% to $1.67 billion. That was well above Wall Street projections of about $1 billion, but since the quarter's revenue included big gains on the company's derivatives positions, the reported revenue and the Wall Street projections really aren't comparable.

For the quarter, the company produced an average of 201,000 barrels of oil equivalent a day, up 28% from the fourth quarter of 2014.

In 2015, the company will shut down all its vertical drilling in the Spraberry/Wolfcamp area by the end of February and cut its horizontal drilling in that area-and in Eagle Ford-roughly in half.

That will help take the 2015 capital spending budget for continuing operations down 45% from 2014 to $1.85 billion. That will, the company projects, bring the capital spending budget roughly in line with operating cash flow of $1.7 billion. (The company will meet the remainder of that capital budget from its $1 billion cash in hand at the end of 2014.) That projection does assume oil prices of $55 per barrel and natural gas prices of $3.00 per thousand cubic feet for 2015. If oil and natural gas prices are below that (and today West Texas Intermediate was trading at $49.36 for March 15 delivery and natural gas at $2.77), Pioneer and other oil companies might be looking at another round of capital spending cuts later in the year. (On the positive side, Pioneer, like most oil companies, has hedged a substantial part of its oil production for 2015. On January 6, the company reported that it had converted 85% of its 2015 derivative contracts from three-way collars to fixed-price swaps. The company said that its hedges cover 90% of forecasted oil production in 2015 at a price of $71 a barrel. Hedges are in place to cover 90% of forecasted natural gas production at an average price above $4.00 per thousand cubic feet).

Of course, in the current oil market, investors should look at more than just current production. There's the question of how fast a company might be drawing down on proved reserves to maintain current production and what its finding and development costs are for new oil. In 2014, Pioneer reported that it added proved reserves of 177 million barrels of oil equivalent from discoveries, extensions of existing discoveries, and revisions of previous reserve estimates. That amounts to a 239% reserve replacement ratio for 2014. Finding and development costs averaged $19.65 a barrel of oil equivalent. Finding and development costs for additions to reserves from horizontal drilling came to $15.51 per barrel of oil equivalent, which tells investors why Pioneer is shutting down vertical drilling operations faster than it's reducing horizontal drilling activity.

In 2015, Pioneer expects production growth in the first half of the year with growth then dropping off in the second half. For the fourth quarter of 2015, Pioneer is expecting production to be essentially flat with the fourth quarter of 2014. Drilling costs-which are already down 10% in 2015 versus 2014-will continue to decline; the company is projecting a 20% drop by the end of 2015 versus 2014.

Pioneer is a member of my long-term Jubak Picks 50 portfolio. At the close on February 11, the shares were trading at $147.06, down another 3.96% on the earnings report and guidance. That price represents a 37% drop from the 52-week high of $234 a share. I think the risks here aren't in the prospects for Pioneer Natural Resources but in another test of $40, or so, oil prices by the market as a whole. I'd wait for that test to buy these shares, but I continue to like this oil shale producer as a long-term holding in any energy portfolio.

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