Pioneer Bets On West Texas Shale Oil To Rival BakkenBy MARILYN...

Pioneer Bets On West Texas Shale Oil To Rival Bakken
By MARILYN ALVA, INVESTOR'S BUSINESS DAILY
Posted 03/14/2012 01:41 PM ET

U.S. oil production is enjoying a renaissance, thanks to new technology that has made oil recovery possible in tight shale rock.

The busy Bakken formation in North Dakota and Montana is the largest and best-known oil shale play.

The Eagle Ford in South Texas and the Barnett "combo play" (gas and oil) in North Texas are also fairly famous unconventional plays.

But the Wolfcamp Shale?

"Over the next two or three years, everybody is going to be making a beeline to the Wolfcamp," said Scott Sheffield, chief executive of Pioneer Natural Resources (PXD).

Spanning numerous counties across West Texas, the Wolfcamp formation is located below the long-plied Spraberry field, which helped make Midland, Texas, oil-central starting in the early 1950s.

Its location in the Midland Basin is within the larger Permian Basin.

Sheffield and other oil experts say the Wolfcamp is probably the thickest of any onshore U.S. oil shale play, with up to 1,000 feet of potential payout across hundreds of thousands of acres.

Biggest And Thickest

"It will be the biggest, and it is already the thickest," Sheffield said. "So it's got the most pay zones of any oil shale play in the U.S. I call it the third or fourth coming of the boom in West Texas."

If Wolfcamp does turn out to be the next big oil shale play, Pioneer is on the ground floor. With 900,000 acres under lease in the Spraberry, it has the largest land position.

Pioneer believes that more than 400,000 of those acres are ripe for horizontal drilling.

Its game plan: drill 10,000 feet down through the Spraberry to the Wolfcamp and then out 7,000 feet horizontally.

For now, it's targeting 200,000 acres in the southern portion of the Spraberry field.

Pioneer's two completed wells in the Wolfcamp have already exceeded expectations, each producing 800 to 1,000 barrels of oil a day, and they're still early in production.

EOG Resources (EOG) started drilling in the Wolfcamp earlier and is now seeing higher output from its 35 or so wells.

But Sheffield says Pioneer will be a bigger operator in the Wolfcamp in the sense that it has 400,000 prospect-worthy acres to EOG's 100,000.

"We are going to drill 80 wells in 2012 and 2013," he said.

EOG's wells in the Wolfcamp are producing 2,000 barrels a day, says Dan Morrison, analyst with Global Hunter Securities.

"Even if Pioneer's don't get to 2,000 barrels a day, at 800 barrels a day the play is incredibly economic," Morrison said.
Only if production were under 400 barrels a day would it not be "awe-inspiring," he added.

Though the first wells in the Wolfcamp cost more than $8 million each, that'll drop to $6 million to $7 million as development expands, management has said. Costs are higher than vertical wells, but the returns are likely to be higher.

Pioneer's first Wolfcamp well, for example, produced seven times more barrels of oil equivalent than a normal Spraberry vertical well over a similar 90-day period.

The economics are especially good with oil prices above $90 a barrel. WTI Crude has been above $100 since last month.

Pioneer believes Wolfcamp will start having a bigger impact in 2013.

Most of Pioneer's current production comes from its three core liquids-rich growth assets in Texas: the Spraberry field, with vertical wells; the Eagle Ford and the Barnett Shale Combo, which has a higher concentration of natural gas than the others.

Pioneer's Spraberry and Wolfcamp production is 90% oily, or liquids-rich, and only 10% gas. Oil-weighted production is viewed more favorably because of high oil prices and low natural gas prices.

Pioneer's fourth-quarter production rose 9% over the prior year to 140,000 barrels of oil equivalent per day. Adjusted income for the quarter was $147 million, or $1.19 per share, up from 51 cents last year.

Analysts estimate 2012 earnings will rise 38% over last year to $5.44 a share and go up another 42% in 2013, says a Thomson Reuters poll.

Pioneer's $2.5 billion capital budget this year is still weighted heavily to vertical oil drilling in the Spraberry ($1.5 billion) with the Wolfcamp trailing at a budgeted $275 million.

Indian Partner

Pioneer's joint venture partner in the Eagle Ford, India's Reliance Industries, is footing about 75% of Pioneer's share of drilling costs in exchange for a 45% interest in Pioneer's core acreage there.

But Reliance's carried interest in the Eagle Ford will largely end next year, analysts say.

Analysts at Barclays Capital have expressed concern that a potential cash shortfall could temper Pioneer's growth plans in 2013 and beyond.

Pioneer will indeed be "very, very close" to using all its estimated $2.8 billion in 2013 cash flow, Chief Financial Officer Richard Dealy said in a conference call in February.

Management has said in the past that it might consider a joint-venture partner in the Wolfcamp in the future to defray costs.

Dealy said in the call that the firm's free cash flow would turn more positive in 2014 and 2015.

Pioneer also has smaller producing assets in Alaska's North Slope and the mid-U.S. and Rockies. It plans to sell its last international asset, in South Africa, by the summer. Production there is next to nothing.

"It's all about Texas," Sheffield said.
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