For a second straight year, Pioneer successfully navigated
an extremely volatile oil market in which prices again
declined precipitously. The Company delivered outstanding
operational performance and is well positioned to grow
through the current commodity price downturn with a
world-class U.S. resource base, a strong financial position
and the best people in the business. Pioneer’s stock was
the second best performing stock in our 12-company
E&P peer group during 2015 and has been the second
best performing E&P stock in the S&P 500 over the past
Last year, we continued our successful horizontal drilling
program in the oil-rich Spraberry/Wolfcamp shale play
in the Permian Basin of West Texas where we have
decades of drilling inventory. This program was the major
contributor to our 12% production growth during 2015
compared to 2014. Oil production increased by 21% over
this same period and represented 52% of our total 2015
production. The Spraberry/Wolfcamp drilling program was
also the key contributor to our proved reserve addition
of 210 million barrels oil equivalent in 2015, or 273% of
full-year 2015 production. These reserves were added at
a highly competitive drillbit finding and development cost
of $10.18 per barrel oil equivalent.
This strong performance was delivered despite a
reduction in our average Spraberry/Wolfcamp horizontal
rig count from 27 rigs in 2014 to 14 rigs in 2015. We
reduced the rig count to preserve capital in response to
the almost 50% drop in the average price of oil between
2014 and 2015. Oil prices remain under pressure given
the current oversupply of this commodity. In general,
this imbalance between supply and demand reflects
the significant supply growth achieved in the U.S. from
oil shale drilling and increased OPEC oil production,
combined with only modest demand growth domestically
and decreasing demand growth in other parts of the
world, particularly in Europe and China.
Although there has been a dramatic decrease in drilling
activity across the industry, oil storage levels in the
United States remain historically high. Until supply and
demand come back into balance and the overhang in
storage levels begins to decline, prices are expected to
remain under pressure. In addition, the lifting of economic
sanctions on Iran has caused the market to anticipate
increased supplies of oil from Iran during 2016, further
weakening the outlook for oil prices. We are hopeful that
prices will begin to recover later in 2016 as supply and
demand fundamentals improve.
The reduced demand for drilling rigs, fracture stimulation
services and oilfield supplies during 2015 has led to a
decline in the costs for these services. We are benefiting
from these lower costs and also realizing significant,
internally driven efficiency gains as drilling and completion
days per well have been reduced dramatically. This is
evidenced in the northern Spraberry/Wolfcamp area
where the average cost per lateral foot to drill and complete horizontal wells in the Wolfcamp B interval decreased by 30% between the fourth quarter of 2014 and the fourth quarter of 2015. During this same period, productivity for these same wells over the first 90 days of production improved by an average of 50% as a result of Pioneer’s completion optimization program.
Despite the lower service costs, efficiency gains and productivity improvements, the oversupply of oil has resulted in further downward pressure on prices during the early part of 2016 and significant operating margin deterioration. As a result, we plan to reduce our horizontal rig count in the Spraberry/Wolfcamp from 18 rigs at the end of 2015 to 12 rigs by the middle of 2016. Even so, we expect to be one of the few companies in our industry that will deliver economic production growth during 2016 in the current weak commodity price environment.
Our plan calls for placing approximately 230 horizontal wells on production in the Spraberry/Wolfcamp during the year. For comparison, Pioneer placed 197 horizontal wells on production during 2015, operating essentially the same number of rigs on average as we expect to operate this year, a reflection of our continuing efficiency gains. We are forecasting estimated ultimate recoveries (EURs) per well from the 2016 drilling program ranging from 800 thousand barrels oil equivalent to 1.2 million barrels oil equivalent. These EURs are benefiting from longer lateral lengths and Pioneer’s completion optimization program.
In the Eagle Ford Shale, where condensate, NGLs and gas are produced, drilling economics became challenged during 2015 as prices for all of these commodities declined. As a result, we decided in early 2016 to curtail all drilling activity in this area until commodity prices recover. In our Rockies and West Texas Panhandle operations, which produce predominantly gas, we continue to focus on maximizing production from existing wells and minimizing costs.
We are in a very strong financial position — perhaps the best in our industry — to weather the current challenging period of low commodity prices.
We are in a very strong financial position — perhaps the best in our industry — to weather the current challenging period of low commodity prices. In December, we issued $500 million of 3.45% senior notes due 2021 and $500 million of 4.45% senior notes due 2026 to fund repayment of 2016 and 2017 bond maturities. In early January, we successfully completed an equity offering that generated net cash proceeds to Pioneer of $1.6 billion. We will also receive $500 million in July as the final payment on the sale of our Eagle Ford Shale midstream business. As a result of these transactions, our investment grade balance sheet had essentially no net debt on a pro forma basis at the beginning of this year.
We also have one of the best derivative positions in the industry to protect our cash flow and margins. In 2015, Pioneer received $875 million in cash proceeds from its derivative positions. Our 2016 positions also have substantial value in this low commodity price environment and provide coverage levels of 85% for oil production and 70% for gas production.
In December 2015, the Congress and President Obama approved legislation to lift the ban on U.S. oil exports. Pioneer was a leading proponent to have the ban lifted. We expect to have the ability to physically export oil by the middle of this year. We have been actively working with midstream partners to secure export facilities along the U.S. Gulf Coast, which will improve our oil marketing flexibility going forward. Europe, Asia and Latin America are potential markets for U.S. oil as countries from these areas could realize economic and security advantages by diversifying their sources of supply.
Pioneer dedicates substantial resources to ensuring that our operations are performed in a manner that protects people and respects the environment. We promote an open culture that empowers everyone with the right and the responsibility to immediately address any unsafe or environmentally hazardous act or condition.
During 2015, all of our business units improved overall employee safety and environmental compliance. We expect further improvements in 2016. Areas of particular focus this year will be driving safety, contractor safety and methane emissions reductions.
Having great assets isn’t enough. Delivering consistently strong results requires a commitment to excellence from all of our people. Pioneer is built on a foundation of respect and teamwork. We have a deep bench of employees who are strong technically and are dedicated team players. In 2015, The Dallas Morning News named Pioneer the number two best place to work among large companies, based on a survey of our employees. This is the sixth year in a row that Pioneer has been ranked in the top three in the Dallas/Fort Worth area.
I want to personally thank each and every person who works at Pioneer for the tremendous contributions they have made to our continuing success. Year in and year out, they meet and often exceed our goals. Our employees also give back in meaningful ways to the communities where they work and live by volunteering their personal time and resources. To sum it up, our people give us a substantial competitive advantage.
In closing, we have successfully managed through down periods in our industry before, and we are very well positioned to do so again. Our 2016 cash flow is protected by attractive oil and gas derivatives, and we have significant cash on the balance sheet. We will continue our diligent focus on reducing costs and improving well productivity so that when markets improve, we will emerge even better prepared to accelerate our drilling activity and economically develop the world-class resources that underpin Pioneer.
Sincerely, Scott D. Sheffield
Chairman and CEO
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