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Are Oil Markets Immune To U.S. Shale?

Oil prices have maintained their…

Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Pioneer’s $2 Operating Costs: Fact Or Fiction?

Pioneer Driller

Image from ShortList.com

Pioneer CEO Scott Sheffield made headlines last week when he claimed that his company’s Permian production costs “…can compete with anything that Saudi Arabia has.”

Is that a lie?

Pioneer’s Q2 2016 Earnings presentation shows that production costs for Permian basin horizontal wells are $2.25 per BOE (Figure 1).That cost cannot be verified because only company-wide production costs are included in the company’s 10-Q Quarterly Report.

(Click to enlarge)

Figure 1. Cash margins by asset. Source: Pioneer Natural Resources Q2 2016 Earnings presentation, Slide 18.

The footnote in Figure 1 indicates that its stated production costs are untrue because they do not include all production costs. A lie is not a lie if you tell everyone that it is a lie.

By including the next line item “Production and ad-valorem taxes,” production costs become $4.13 instead of $2.25 per BOE. As Figure 1 shows, Pioneer’s overall production costs are $6.66 per BOE.

In fact, Pioneer’s total variable costs for the second quarter of 2016 were almost $18 per BOE (Table 1).This is the standard method to evaluate a company’s costs. It does not include considerable expenses for salt-water disposal because they are not mentioned in the company’s 10-Q.

(Click to enarge)

Table 1. Pioneer Natural Resources variable costs summary table. Source: 10-Q Filing July 2016 and Labyrinth Consulting Services, Inc.

Pioneer’s realized price for the first half of 2016 was $28.95 per BOE so the truth is that the company only has about $10 of margin before major capital expenditures of $7 million to drill and complete each well, much less pay royalties and income taxes! Break-even price for Pioneer’s average Trend Area-Spraberry well is about $52 per BOE. I’m sure the Saudis are scared to death about that. Related: Oil Prices Fall Below $40 As OPEC Ramps Up Output

Pioneer has “cherry-picked” the very best of their production and focused only on its production expenses thereby excluding 85 percent of its stated variable costs—to what end? Pioneer is a solid company that compares favorably with its competitors. After a rough first quarter for all companies, performance improved markedly in the second quarter and first half of 2016 (Figure 2).

(Click to enlarge)

Figure 2. Pioneer’s financial performance improved in the second half of 2016. Source: Company documents and Labyrinth Consulting Services, Inc.

The company outspent cash flow by 2-to-1, down from almost 5-to-1 in the first quarter. Debt-to-cash flow moved back within today’s bank-risk tolerance of less than 4-to-1 after exceeding 8-to-1 in the previous quarter. Why couldn’t Sheffield have pointed to this data as evidence that Pioneer is a strong performer among the shale players?

Sheffield is known for grandiose flights of fantasy. In 2013, he stated “The Spraberry Wolfcamp could possibly become the largest oil and gas discovery in the world,” comparing it to Ghawar, the world’s largest oil field. A year ago, Pioneer published a news release claiming Spraberry Wolfcamp “EURs averaging approximately 1 MMBOE, with IRRs averaging 50 percent to 60 percent at current strip commodity prices” that were around $45 per barrel. My work indicates an average EUR for those horizontal wells of approximately 300,000 BOE and financial results for Pioneer hardly reflect the returns stated in that release.

No credible oil and gas analyst believes those claims any more than recent statements that Pioneer’s well costs can compete with Saudi Arabia.

The shale gas and tight oil companies have developed a culture of exaggeration and misrepresentation. They have consistently tried to make the ludicrous case that a terrible reservoir and super-expensive technology can somehow out-perform much cheaper wells and better reservoirs in conventional plays. Related: Electric Vehicles Won’t Kill Off Oil Demand Anytime Soon

It’s an unnecessary case to make because we’ve been out of those better, cheaper plays in the U.S. for decades. But, once you get started with embellishment, it leads to deception and then, it’s hard to remember what the truth is or even why you’re telling such unbelievable stories in the first place.

Investors play a role too. Many prefer a make-believe reality where America is great again, and they can dream of making crazy profits like in the good old days.

Seventy percent of Pioneer’s production is in the Permian basin (Table 2) and 80 percent of Permian production is from horizontal wells. So, 55 percent of Pioneer’s production is from the same subset of wells that Sheffield says can compete with Saudi Aramco.

(Click to enlarge)

Table 2. Pioneer production by area. Source: Pioneer 2016 10-Q Report.

If I were a Pioneer investor, I would ask Scott Sheffield at the next earnings call why he doesn’t just sell all of the company’s assets except horizontal wells in the Permian basin. Then we will find out if his comments are a lie or not.

Art Berman for Oilprice.com

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  • Robert McMillan on August 01 2016 said:
    Under $5 per BOE in the Permian? I call. Let the people who boast of such costs furnish full LOE/LOS (Lease Operating Expense/Lease Operating Statements) by field/group to back it up....the same one their engineers use to book reserves. And be certain you include those in-house G&A costs of those engineers, geologists, and accountants who keep the lights on, as well as the associated cost for those "in-house" SWD wells that handle the water.
  • Michael on August 01 2016 said:
    It's a complete and total lie- he's only counting flowing wells and not figuring in disposal of flow back and produced water, because they own their own disposals and infrastructure- those disposal wells cost $4mm to get up and running and an immense amount of electricity and loe once they're running- also, once wells stop flowing, electricity, chemical and other associated loe come in to play- he's a promoter, always has been, but no one calls his bluff or audits these figures. Just like the 700-100mm bbl EUR's- I've got lots of interests in horizontal pioneer wells that have made 100,000 bo and now put along at 20 bopd- he says what he's allowed to, because nobody checks the facts. Analysts believe whatever comes out of his mouth, and other independent and mid-major company ceo's as well. Once we all realize <5% of all horizontals being drilled now will pay for themselves, what happens then?
  • G. Vincent Foreman on August 03 2016 said:
    For what ever reason, Sheffield, as CEO of Pioneer, decided to publicize information presenting Pioneer’s operating cost in the most favorably of lights. As mentioned in the original article from 07/28/16, after 33 years with Pioneer, Sheffield is facing retirement before the end of this year, 2016. His statement, as misleading and miss-informative as it is, is his way of painting his tenure at the helm, the intrinsic value of Pioneer and his exit from Pioneer in as favorable a financial light as possible. Viewed from such perspective, I’m willing to “cut the old boy some slack”, except for the following fact: his declaration of “$2.25 per barrel” production cost does the oil industry a disservice on so many different levels.
    From an information standpoint: Sheffield’s statement demonstrates how far an individual, even the head of a corporation and in the public eye, is willing to go to place the company “under” him in as “bright” a light as possible. Nevertheless, Sheffield’s statement does a dis-service to the oil industry on a number of levels.
    From an information level: Sheffield’s statement demonstrates how far off the tracks the head of corporation will go to “endorse” facts that are not even “half truths” aimed at creating a “caricature” of reality.
    From an investment standpoint: Sheffield’s misrepresentation of Pioneer’s production cost requires investors to second, third guess any and all oil proposals “crossing their desk”. Anyone in the financial world recognizes “doubt with respect to the validity, the quality, the honesty, the veracity of an investment proposal” is the seed of death from an acceptance standpoint. By releasing such obviously inaccurate, phased, slighted information, Sheffield’s has waved a red flag to the investment industry indicating Pioneer, and by extension other oil concerns, can’t be trusted.
    In essence, Sheffield’s comment is the epitome of, a prime example of the Texas adage that “someone” is “urinating on our boots and tell us it’s raining”. My only words of advice to Mr. Sheffield is this: don’t go away mad, just go away.

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