Pioneer sells Eagle Ford midstream business for $2.15 billion

Resetting the business to stay profitable

Pioneer Natural Resources Co. (NYSE: PXD) and Reliance Holding USA Inc. have entered into a purchase and sale agreement with an affiliate of Enterprise Products Partners LP to sell their Eagle Ford Shale midstream business (EFS Midstream) for $2.15 billion. Pioneer owns 50.1% of EFS Midstream and Reliance owns the remaining 49.9%.

Pioneer and Reliance will also benefit from fee reductions under existing downstream processing and transportation contracts with Enterprise in exchange for extending the contract term to 20 years and dedicating additional Eagle Ford Shale volumes to Enterprise. The reduced fees are expected to benefit Pioneer and Reliance over the original terms of the downstream contracts by approximately $200 million on a net present value basis at 10%. These reduced fees will primarily be reflected as improvements in future realized prices. Enterprise has also agreed to spend $270 million over the next 10 years on new facilities, connections and expansions to support the continuing development of the Eagle Ford Shale resource.

The purchase price for the EFS Midstream business will be paid by Enterprise in two installments: $1.15 billion at closing, which is expected to occur early in the third quarter of 2015, and $1 billion twelve months after closing. After retiring the debt of EFS Midstream of approximately $150 million, Pioneer’s share of the net sale proceeds, before normal closing adjustments, is expected to be $500 million at closing and $500 million one year later.

The sale of EFS Midstream is expected to result in a pretax gain in excess of $725 million to Pioneer, which is expected to be recognized in the third quarter of 2015. Pioneer expects net cash proceeds from the sale to total approximately $900 million after tax. In addition, Pioneer will realize its $100 million share of the reduced transportation and processing fees associated with the new downstream agreements. The sale of EFS Midstream is also expected to enhance Pioneer’s ability to export processed Eagle Ford Shale condensate.

The transaction is expected to close in the third quarter of 2015. Upon closing of the transaction, Pioneer will no longer receive its share of the cash flow generated by the EFS Midstream business, which was forecasted to be more than $100 million in 2015. The loss of this cash flow will result in an increase to Pioneer’s Eagle Ford Shale production costs of approximately $3.00 per barrel oil equivalent (boe) and total corporate production costs of approximately $0.75 per boe.

The EFS Midstream business was formed in 2010 to construct facilities to provide gathering and handling services for condensate and gas produced from wells in the Eagle Ford Shale. The EFS Midstream system currently consists of 10 central gathering plants and approximately 460 miles of pipelines. The system gathers and separates produced condensate from produced gas. It also stabilizes the condensate, where necessary, and treats the gas. These services are provided for the Eagle Ford Shale upstream joint development operated by Pioneer (Pioneer–46%, Reliance–45%, and Newpek LLC–9%) and for various third parties.

Resetting the business to stay profitable
Following news of the deal, Wunderlich Securities analyts reiterated a Buy rating for Pioneer, noting the company has "effectively resumed its growth trajectory and reset its business to stay profitable even at today’s commodity pricing."

We are impressed by PXD’s ability to monetize its mid-stream assets and redeploy the cash towards ramping up its rig count. To start 2016 with the same rig count as pre-crash level is outstanding, in our view. The company has used this downturn to compress costs and enhance its margin. In addition, PXD continues to hedge its production, which is really important, as the only likelihood, we believe, is more volatility in crude, liquids, and gas prices," the analysts continued.

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