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| Brought to you by The Oxford Club | Monday, August 8, 2016 |
Why Two Men Bet $3.03 Billion...
Two billionaires recently made huge bets on a single stock.
The first, one of the 20 richest people in the United States, put $1.33 billion down.
The second, a man who literally wrote the book on safety, put in even more... $1.7 billion.
Why are they so confident? In short, because this company is set to do something nobody has ever done in the history of the markets. Here's the full story. |
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One Oil Insider Plans to Drill Here for 150 Years
 It's no secret that Saudi Arabia has been pumping flat-out to protect market share. And, so far, its efforts have been largely successful.
The brunt of the damage has been borne by the U.S. oil industry. More than 20 U.S. exploration and production companies have filed for bankruptcy since the start of 2016.
In 2015, 42 filed for Chapter 11, with a combined debt of $17.85 billion. Ouch...
But not all E&Ps are feeling the hurt. Take Pioneer Natural Resources (NYSE: PXD) for example. It's doing just fine.
Unlike many of its peers, Pioneer is focused on what CEO Scott Sheffield calls the "Mother Lode of Oil." He's talking about the Permian Basin.
The Permian is unlike any other shale play. It has 12 to 14 different levels, with combined oil-bearing pay zones totaling 4,000 feet.
As a result, Pioneer will be drilling there for the next 100 to 150 years.
It's already paying off. In the second quarter alone, Pioneer turned on 69 new horizontal Spraberry/Wolfcamp wells. It completed 37 of them using its latest well optimization program, Version 3.0.
While its Version 3.0 well optimization results are still secret, Pioneer is realizing significant gains in its efficient deployment of capital from the program. It has reduced the company's cost per barrel of oil equivalent by 26% from January-June 2015 through the same period this year.
During the quarter, the company signed a sales agreement to purchase about 28,000 acres in the Midland Basin from Devon Energy Corp. (NYSE: DVN) for $435 million. The companies expect to close on this transaction in the third quarter of this year.
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Pioneer is increasing its 2016 capital budget by $100 million, to $2.1 billion, to cover adding five more drill rigs in the third and fourth quarters. It expects to be able to fund its drilling program through the end of 2017 without taking on any additional debt.
That is impressive, especially with WTI prices in the dumper. Of course, having good acreage to work with certainly helps.
Pioneer used to explore for oil all over the world. That all changed when a geologist estimated Pioneer had 10 billion barrels of net reserves on its Permian acreage.
The company sold off all of its international holdings and focused on the Permian and Eagle Ford basins. In 2010, Pioneer drilled and fracked its first well into the Spraberry formation of the Permian.
Once it started drilling the Permian, it never stopped. By the end of this year, it will have 17 rigs drilling in the region.
Like many of its peers, Pioneer was slowed by the recent downturn in oil prices. But, as I mentioned earlier, Pioneer is unique in that the downturn hasn't crippled it. In fact, the dip forced the company to become more efficient and change how it drills wells.
It used to drill 10,000-foot-long laterals. But the Permian contains so much oil, Pioneer started decreasing its lateral length and the spacing between them. It even decreased its vertical well spacing.
Both resulted in more oil from the same amount of ground.
As a result, Pioneer knows how to drill inexpensively in the Permian. Its average finding cost per barrel is $10, administrative costs are $5 and well operating cost is $4.
Pioneer's operating margin on Permian wells is $19 per barrel. Everything above that is pure profit. Which means, at $45 per barrel, Pioneer has a 35% to 45% return.
Even with WTI oil prices in the $40-per-barrel range, this E&P is turning a profit. It has its own ingenuity and the Permian Basin to thank.
Of course, Pioneer isn't the only big player in the Permian Basin...
Other successful companies operating there include Diamondback Energy Inc. (Nasdaq: FANG), Concho Resources Inc. (NYSE:CXO), Cimarex Energy Co. (NYSE: XEC) and Laredo Petroleum Inc. (NYSE: LPI).
Long-term oil investors should look into these stocks. Because when it comes to the Permian, it's all upside from here.
Good investing,
Dave |
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Since Congress extended the renewable investment tax credit, residential solar has been on a tear. But a new, disruptive market is emerging that fits nicely with solar. Read On... |
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After returning from another site visit in Mexico - where natural gas consumption is swiftly ticking upward - I really want to join the natural gas party. Read On... |
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