Pioneer Natural Resources Co. (NYSE:PXD) signed a purchase and sale agreement with Devon Energy Corp. to acquire approximately 28,000 net acres in the Midland Basin for $435 million. The acreage is located in Martin, Midland, Upton, Reagan, Glasscock, Andrews, Dawson, Gaines and Howard counties. Current net production is approximately 1,000 barrels of oil equivalent per day (boe/d), with oil comprising approximately 70% of the production. Substantially all of the acreage is held by production.
For Devon, the deal one of a pair announced yesterday monetizing remaining non-core assets in the Midland Basin. More broadly, Devon has sold non-core assets to the tune of $2.1 billion.
For Pioneer, based on management’s improving outlook for oil prices, the company is "ramping up in a big way," said Wunderlich Securities analyst Irene Haas. Pioneer estimates production growth of 13%-17% in 2017 with 17 rigs running, exceeding Wunderlich estimates of 10%. As for price, netting out production priced at approximately $35,000 per flowing barrel, Wunderlich estimates the company paid close to $14,000 per acre for the land.
The majority of the acreage is located in the core of the Midland Basin. Of the core acreage being acquired, approximately 15,000 net acres are located in the Sale Ranch area in Martin County and northern Midland County where Pioneer has drilled its most productive Wolfcamp B wells. The majority of the Wolfcamp B acreage being acquired in Sale Ranch sits directly below Pioneer’s Wolfcamp A acreage.
Breaking down the deal, Pioneer gains approximately 70 Wolfcamp B locations (with 9,000’ laterals). "At the Sale Ranch, an average 9,000’ Wolfcamp B well can generate returns north of 50% and with a pretax NPV of $10 million per well assuming strip pricing and D&C costs of $8 million," Haas noted.
And the Sale Ranch is prolific, she continued. "PXD has been working on the Wolfcamp B interval at the Sale Ranch with 41 horizontal wells on production. The average 30-day flow rate for the 7,000’ laterals is 1,375 boepd (78% oil). For the 9,500’ laterals, the wells have averaged 1,760 boepd (79% oil). Thus far the wells drilled here have exceeded PXD’s 1 mmboe EUR type curve by 10% for the 7,000’ laterals to 90% for the 12,000’ laterals."
The remaining 8,000 net acres in the Sale Ranch area and northern Midland County include approximately 80 Wolfcamp B locations where wells with lateral lengths of less than 7,500 feet can be drilled. Pioneer will have an average working interest of 68% in these locations. Pioneer plans to acquire or trade for additional acreage adjacent to these leases in order to increase its working interests and extend well lateral lengths to greater than 7,500 feet.
Pioneer plans to use the remaining 13,000 net acres being acquired, along with existing acreage, in trades to further consolidate larger contiguous acreage positions in the core of the Midland Basin, which will enable longer lateral wells to be drilled. Since early 2015, Pioneer has traded or acquired approximately 19,000 gross acres, adding nearly 3.2 million feet of gross lateral length to the company’s Spraberry/Wolfcamp horizontal drilling program.
In conjunction with this acquisition and the company’s improving outlook for oil prices, Pioneer expects to increase its horizontal rig count by five rigs from 12 rigs to 17 rigs in the northern Spraberry/Wolfcamp, with the first rig to be added in September 2016 and two additional rigs added in each of October and November 2016. The company expects to utilize three rigs to drill the locations being added in the Sale Ranch area. The company’s 2016 capital budget is expected to increase by approximately $100 million from $2.0 billion to $2.1 billion as a result of the rig additions. This $2.1 billion is expected to be funded from forecasted operating cash flow of $1.5 billion, cash on hand and the remaining $500 million of proceeds from the Eagle Ford Shale midstream business sale that will be received in July 2016.
Pioneer issued equity, raising gross proceeds of $827 million, to pay for the purchase, "and then some," noted Haas. The overage will help fund drilling and continue Sprayberry/Wolfcamp development. Offsetting the effect of the dilution of newly issued shares, Haas noted, is "an earlier than expected rig ramp as well as higher than expected 2017 production."
The acquisition is subject to customary closing conditions and is expected to close during the third quarter of 2016.