Pioneer Goes ‘Bold’ as Devon Retreats in Top U.S. Oil Field

  • Shale driller Pioneer to accelerate drilling in Permian Basin
  • Devon says sales mean divestitures plan is ahead of schedule

Pioneer Natural Resources Co. is purchasing drilling rights from Devon Energy Corp. in a Texas shale field that’s home to some of the buyer’s biggest gushers.

Investors panned the $435 million transaction that is being financed with new Pioneer stock that will dilute the value of their holdings. Pioneer was one of the worst-performing oil producers in the S&P 500 Index on Thursday, declining more than 5 percent after announcing the deal late Wednesday to acquire Devon’s rights to explore 28,000 acres in Permian Basin in Texas.

Pioneer, which in recent years cast off a far-flung portfolio of international oil fields to concentrate almost exclusively on Texas shale, said most of the acquired rights lie adjacent to -- or in some cases, directly below -- assets the company already owns.

Pioneer expects wells it drills in those zones to generate pre-tax returns of 50 percent or more, according to the statement announcing the deal. The 28,000-acre package is in a section of the Permian known as the Midland Basin, where Pioneer has been drilling 2-mile-long oil wells expected to yield a million barrels each.

The Irving, Texas-based explorer priced its public offering of 5.25 million new shares at about $827 million, according to a separate statement on Thursday. That implies a per-share price of $157.52, a 3.1 percent discount to Wednesday’s close. The underwriters’ 30-day option to buy an additional 787,500 shares would push the total issuance to about 6 million shares.

‘Gone Bold’

Pioneer “has gone bold” by expanding its footprint in the Permian Basin, Daniel Katzenberg, an analyst at Milwaukee-based Robert W. Baird & Co., said in a note to clients. The driller is among the class of shale explorers in a position to “consolidate core positions and raise matching funds to preserve balance sheet health.”

Pioneer fell 5.1 percent to $154.21 at 10:03 a.m. in New York. Devon declined 3.8 percent to $33.76.

Pioneer also raised its full-year 2016 capital budget by $100 million to $2.1 billion, bucking the trend among oil explorers who have been slashing drilling budgets to cope with the drop in prices between mid 2014 and earlier this year. The company isn’t done amassing drilling rights in the region; Pioneer said it plans to buy or trade for more adjacent assets so it can drill even longer sideways wells.

Pioneer said it plans to boost drilling in the area of the acquisition by 42 percent to 17 rigs later this year. Devon will use part of the proceeds to boost investment in the nearby Delaware Basin.

Drilling Increases

Buoyed by an 80 percent, four-month rally in oil prices, some U.S. producers have resumed drilling after idling more than 1,000 oil rigs since the start of last year. Twelve crude rigs were brought off the sidelines in the past two weeks, the first consecutive increases since August, according to a Baker Hughes Inc. data.

The drilling increases announced by Devon and Pioneer on Wednesday followed Continental Resources Inc.’s decision last week to dispatch fracking crews to unfinished wells in North Dakota’s Bakken shale region. Continental Chairman and Chief Executive Officer Harold Hamm told Bloomberg News on June 9 that crude prices have risen enough to justify boosting output, sparking concern among some analysts of a return to the supply glut that crashed the market in 2014 and 2015.

“The larger issue that investors should consider is whether Devon’s actions will enable other operators to take similar actions, breaking up the psychological logjam blocking higher activity in the onshore U.S.,” Eric Fox, an analyst at Iberia Capital Partners LLC, said in a note to clients. “This trend will likely reverse the positive fundamentals on the supply side that have supported higher oil prices.”

Divestitures Plan

For Devon, the Pioneer deal is part of a package of sales amounting to $858 million. The transactions include oil fields in the southern Midland Basin and an undeveloped leasehold in Martin County, Texas, Devon said in a separate statement on Wednesday. The sales bring the total Devon has agreed to so far this year to $2.1 billion.

CEO Dave Hager said the deals mean that plans to sell exploration and production assets is ahead of schedule.

“We are pleased to announce these highly accretive non-core divestitures, concluding our E&P sales process ahead of schedule,” Hager said in the statement. “At least two-thirds of our asset sales proceeds are expected to be used to further strengthen our investment-grade balance sheet, while one-third are targeted for reinvestment in our best-in-class U.S. resource plays.”

More Lucrative

Hager has been unloading assets to shore up the company’s balance sheet while focusing on oil plays he has said will be more lucrative for Devon. Aside from the Permian Basin, areas where the Oklahoma City-based driller has shed holdings have included East Texas and Oklahoma.

Hager is plowing money into the Delaware Basin -- a Permian region about 100 miles west of the Midland Basin -- and the Stack formation in Oklahoma, areas where Devon’s wells are still profitable despite lower crude prices.

He said that the asset sales will help Devon boost spending in the Delaware and Stack regions by $200 million this year, increasing the company’s 2016 capital spending target for the year to as much as $1.3 billion. The company also raised its forecast for 2016 production by the equivalent of 7,000 barrels of oil a day, to a range of 540,000 to 560,000 barrels.

Before Wednesday’s announcement, Devon had risen almost 10 percent this year after losing almost half its market value in 2015.

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