Pioneer Natural Resources Company (PXD) ("Pioneer") reported financial and operating results for the quarter ended March 31, 2021. Pioneer reported a first quarter net loss attributable to common stockholders of $70 million, or $0.33 per diluted share. These results include the effects of noncash mark-to-market adjustments and certain other unusual items. Excluding these items, non-GAAP adjusted income for the first quarter was $396 million, or $1.77 per diluted share. Cash flow from operating activities for the first quarter was $377 million.
- Delivered first quarter free cash flow1 of $369 million
- Averaged first quarter oil production of 281 thousand barrels of oil per day (MBOPD), above the top end of guidance
- Averaged first quarter production of 474 thousand barrels of oil equivalent per day (MBOEPD), above the top end of guidance
-Closed the highly accretive acquisition of DoublePoint Energy (DoublePoint) on May 4th
CEO Scott D. Sheffield stated, “Pioneer delivered an excellent quarter, successfully integrating Parsley’s assets, while navigating the substantial impacts of winter storm Uri that occurred in February. Our drilling, completions and operations teams continue to exceed expectations, driving a capital and operationally efficient program focused on free cash flow generation.
“In early April, we announced the highly accretive acquisition of DoublePoint, which comprises approximately 97,000 highly contiguous net acres in the core of the Midland Basin. This acquisition adds over 1,200 tier one locations that generate strong returns and are equally competitive with Pioneer’s legacy inventory. Given the hand-in-glove fit of DoublePoint’s acreage with ours, we expect to achieve synergies of approximately $175 million annually, leading to double-digit free cash flow per share and variable dividend per share accretion.
“With an incremental $5 billion in free cash flow1 expected to be generated from DoublePoint assets through 2026, Pioneer currently anticipates delivering approximately $23 billion of free cash flow1 during the same period at strip pricing. We expect to return approximately 80% of this free cash flow through our base and variable dividend structure2, strengthening our value proposition to shareholders.”
Pioneer maintains a strong balance sheet, with unrestricted cash on hand at the end of the first quarter of $668 million and net debt of $5.5 billion. The Company had $2.7 billion of liquidity as of March 31, 2021, comprised of $668 million of unrestricted cash and a $2.0 billion unsecured credit facility (undrawn as of March 31, 2021).
During the first quarter, the Company’s drilling, completion and facilities capital expenditures totaled $591 million. The Company’s total capital expenditures3, including water infrastructure, totaled $605 million.
Cash flow from operating activities during the first quarter was $377 million, leading to free cash flow1 of $369 million for the quarter, excluding cash transaction costs of $172 million related to the Parsley Energy, Inc. (Parsley) acquisition.
In addition to increasing Pioneer's quarterly cash dividend to $0.56 per share, the Company initiated a long-term variable dividend policy in 2021, which is expected to increase the Company's return of capital to shareholders. Consistent with Pioneer’s long-term investment framework, the Company expects to annually distribute up to 75% of the prior year’s annual free cash flow, after the payment of the base dividend2, assuming the Company’s leverage metrics remain low. Pioneer expects to begin to pay the quarterly variable dividend distributions in 2022. For 2022, the Company expects to distribute up to 50% of the 2021 free cash flow, after the payment of base dividends, assuming the average 2021 West Texas Intermediate (WTI) oil price is greater than $42 per barrel.
Pioneer continues to capture the expected annual synergies from the acquisition of Parsley and expects to capture an additional $175 million from the acquisition of DoublePoint, bringing the combined annual synergy total to $525 million, with a PV-10 of greater than $3 billion over ten years. The Company is progressing on these synergies, with $100 million of annual interest savings and $100 million of general and administrative (G&A) savings related to the Parsley acquisition being fully realized. The interest and G&A savings related to DoublePoint are expected to be realized during the second quarter, and the operational synergies related to both transactions are expected to progress throughout the year and be fully realized by year-end 2021.
For the first quarter of 2021, the average realized price for oil was $56.71 per barrel. The average realized price for natural gas liquids (NGLs) was $25.90 per barrel, and the average realized price for gas was $3.04 per thousand cubic feet. These prices exclude the effects of derivatives.
Production costs, including taxes, averaged $8.54 per barrel of oil equivalent (BOE). Depreciation, depletion and amortization (DD&A) expense averaged $11.11 per BOE. Exploration and abandonment costs were $19 million, or $11 million excluding unusual items. G&A expense was $68 million. Interest expense was $39 million. The net cash flow impact related to purchases and sales of oil and gas, including firm transportation, was a loss of $15 million. Other expense was $304 million, or $22 million excluding unusual items4.
During the first quarter, Pioneer continued to deliver strong operational efficiency gains that enabled the Company to place 106 horizontal wells on production. Drilling operations averaged approximately 1,250 drilled feet per day and completion operations averaged approximately 2,000 completed feet per day during the first quarter, an increase of 9% and 8%, respectively, when compared to 2020 averages Improvements in drilling and completions operations continue to benefit the Company’s overall capital efficiency.
The Company expects its 2021 drilling, completions and facilities capital budget to range between $2.95 billion to $3.25 billion, inclusive of an additional $530 million to $570 million related to the DoublePoint acquisition. An additional $100 million and $50 million is budgeted for integration expenses related to the acquisition of Parsley and DoublePoint, respectively, resulting in a total 2021 capital budget3 range of $3.1 billion to $3.4 billion. The Company expects its capital program to be fully funded from forecasted 2021 cash flow5 of approximately $5.9 billion.
During 2021, the Company plans to operate an average of 22 to 24 horizontal drilling rigs in the Permian Basin, including a one-rig average program in the Delaware Basin and a three-rig average program in the southern Midland Basin joint venture area. Pioneer plans to reduce the operated rigs on DoublePoint acreage from 7 rigs in May to 5 rigs by the end of the year, or by approximately 30%. The 2021 capital program is expected to place 470 to 510 wells on production, which includes the addition of approximately 90 wells on the acreage acquired in the DoublePoint transaction.
Pioneer expects 2021 oil production of 351 to 366 MBOPD and total production of 605 to 631 MBOEPD, which includes current production from DoublePoint of approximately 92 MBOEPD and approximately 100 MBOEPD forecasted during the second half of 2021.
Pioneer has redefined its investment framework to prioritize free cash flow generation and return of capital to shareholders. This capital allocation strategy is intended to create long-term value by optimizing the reinvestment of cash flow to accelerate the Company's free cash flow profile. At current strip pricing, the Company expects its reinvestment rate to be between 50% to 60%, generating increased free cash flow. Pioneer is targeting a 10% total annual return, inclusive of a strong and growing base dividend, a variable dividend and high-return oil growth. The Company believes this differentiated strategy positions Pioneer to be competitive across industries.
Pioneer continues to maintain oil derivative coverage in order to protect the balance sheet, providing the Company with operational and financial flexibility. The Company’s financial and derivative mark-to-market results and open derivatives positions are outlined in the attached schedules.
Second Quarter 2021 Guidance
Second quarter 2021 oil production is forecasted to average between 352 to 367 MBOPD and total production is expected to average between 606 to 632 MBOEPD. Production costs are expected to average $6.75 per BOE to $8.25 per BOE. DD&A expense is expected to average $10.75 per BOE to $12.75 per BOE. Total exploration and abandonment expense is forecasted to be $10 million to $20 million. G&A expense is expected to be $67 million to $77 million. Interest expense is expected to be $43 million to $48 million. Other expense is forecasted to be $15 million to $30 million. Accretion of discount on asset retirement obligations is expected to be $2 million to $5 million. The cash flow impact related to purchases and sales of oil and gas, including firm transportation contracts and similar marketing derivatives is expected to be a loss of $40 million to $70 million, based on forward oil price estimates for the quarter. The Company’s effective income tax rate is expected to be between 21% to 25%. Cash income taxes are expected to be $5 million to $10 million, principally related to state income taxes.
Environmental, Social & Governance (ESG)
Pioneer views sustainability as a multidisciplinary focus that balances economic growth, environmental stewardship and social responsibility. The Company emphasizes developing natural resources in a manner that protects surrounding communities and preserves the environment.
Consistent with Pioneer's sustainable practices, the Company has incorporated greenhouse gas (GHG) and methane emission intensity reduction goals into its ESG strategy, with goals to reduce the Company's GHG emissions intensity by 25% and methane emissions intensity by 40% by 2030, inclusive of the assets Pioneer acquired from Parsley. These emission intensity reduction targets are aligned with the Task Force on Climate-related Financial Disclosures criteria for target setting.
In addition, the Company is building on its leadership position related to minimizing flaring and has formally adopted a goal to maintain the Company's flaring intensity to less than 1% of natural gas produced. Pioneer also plans to end routine flaring, as defined by the World Bank, by 2030 with an aspiration to reach this goal by 2025.
Socially, Pioneer maintains a proactive safety culture, supports a diverse workforce and inspires teamwork to drive innovation. The Board of Directors’ Health, Safety and Environment (HSE) and Nominating and Corporate Governance Committees provide director-level oversight of these activities. These committees help to promote a culture of continuous improvement in the Company’s diversity and inclusion and safety and environmental practices. Consistent with the high priority placed on HSE and ESG, the Board of Directors has increased the executive annual incentive compensation weighting for these metrics from 10% to 20% beginning in 2021.
In addition to the increased weighting towards HSE and ESG metrics, Pioneer's executive incentive compensation continues to be aligned with shareholder interests. Beginning in 2021, return on capital employed (ROCE) has been included as an incentive compensation metric, along with cash return on capital invested (CROCI), which was added in 2020. These metrics have a combined weighting of 20%, while production and reserves goals previously included as incentive compensation metrics have been removed.
Pioneer has amended executive equity compensation as well, with the S&P 500 index being added into the total stockholder return (TSR) peer group for performance awards beginning in 2021, and for the second consecutive year the long-term equity compensation for the Company’s Chief Executive Officer will be 100% in performance awards, with 100% of such awards at risk based on performance relative to the TSR peer group. These updates to Pioneer’s executive incentive and equity compensation programs demonstrate the Company’s continuing commitment to aligning total executive compensation with the interests of our shareholders.