Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Pioneer Natural Resources Co. just announced shale's version of a moonshot. By 2026, it aims to be pumping out 1 million barrels of oil equivalent a day -- four times last year's total.

Growing at 15 percent a year, compounded, for a decade is the sort of promise usually reserved for Silicon Valley, not west Texas. Having unveiled thumping results on Wednesday morning, though, Pioneer can afford to be expansive.

Indeed, as with many a tech startup, there's a self-fulfilling logic to Pioneer setting seemingly impossible goals. Consider this line from a response by CEO Tim Dove to an analyst question about those growth plans on Wednesday morning:

It's only a matter of how much capital we want to put to work.

When it comes to the battle over the oil market, if shale is the loaded gun pointed at OPEC, then U.S. capital markets provide the bullets. As I've written before, the unexpected resilience of U.S. oil and gas production amid low prices owes much to the sector's ability to tap investors for more money with the promise of growth in return.

Sweet '16
U.S. E&P firms sold more new equity in 2016 -- in the depths of the oil crash -- than in the prior two years combined
Source: Bloomberg

As if to prove the point, Parsley Energy Inc. announced on Tuesday evening  a $1.1 billion offering -- its ninth of the past three years -- in order to buy land right alongside some of Pioneer's own in the prolific Permian shale basin.

Pioneer's message is essentially this: We can keep drilling wells in the Permian basin ad infinitum; the only thing limiting us is choosing the most profitable opportunities and having the capital to exploit them; and we are getting more efficient with each passing year.

The latter element is critical to keeping the capital flowing, and Pioneer has shown remarkable progress on this front. Like all E&P companies, its average realized price -- actual revenue per barrel of oil equivalent, factoring in regional price differences and mix of oil versus natural gas -- has been crushed:

Cruel Realization
Pioneer's average realized price has fallen by almost half since 2013
Source: The company, Bloomberg Gadfly analysis
Note: Excludes hedging effects. Figures inferred from production and pricing data reported by Pioneer rather than stated revenue figures.

One thing helping to offset this pressure is the rising mix of higher-value oil in Pioneer's production mix: 56 percent in 2016 versus 41 percent three years earlier. That alone added back almost $4 per barrel of oil equivalent to the realized price, based on Gadfly's analysis.

Pioneer has also upped its game on efficiency, though. Building off a Gadfly survey of fully loaded production costs for 11 E&P companies (see here), here's Pioneer's estimated margin after accounting for production costs, general and administrative overhead, non-income taxes and interest charges:

Holding Up
Despite realized prices falling further in 2016, Pioneer's margin per BOE increased 25 percent
Source: The company, Bloomberg Gadfly analysis
Note: Excludes hedging effects. Implied margin per BOE after production costs, G&A, interest and non-income taxes.

That combination of a rising oil cut in the mix and evidence of continuing cost cuts is an intoxicating mix for any E&P investor. Now throw in a 10-year plan -- a rarity in a sector where 12 months is the usual horizon -- that implies oil production jumping five-fold , and you've really got the market's attention.

How much faith should investors put in a 10-year plan in an industry that's been through two booms, a crash and a shale revolution in the past decade? Whether or not that 1 million barrel-a-day target gets etched in stone is mostly beside the point. As a statement of intent, backed up with some credible results on growth and efficiency, it will likely do the job in terms of keeping the capital spigot open (just ask Elon Musk).

Wilting Parsley
Parsley Energy shares fell after the Permian shale company announced a new stock offering

The timing is important, as a flurry of M&A activity in the Permian basin raises concerns of a bubble. It's worth noting that, as of early afternoon on Wednesday, Parsley's stock was trading barely above the $31 level at which it sold new shares. If it closes below that mark, it would be the first time the stock did that after a stock sale, according to Bloomberg data. Meanwhile, shares in Jagged Peak Energy Inc., a Permian-focused E&P company, continue to trade below their debut price of just two weeks ago -- which itself was below the initial range.

Signs of investor fatigue? Possibly. OPEC, for one, had best hope so. Pioneer's plan implies that, by 2026, it alone would be producing an amount of oil equivalent to more than 8 percent of the entire output of the U.S. today. If it gets anywhere close to that, then belief in OPEC's own powers will be the casualty.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Pioneer's plan calls for overall production rising four-fold by 2026. But it also targets the proportion of oil rising from 56 percent to 70 percent; hence, oil output would rise by a factor of five in that scenario.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net