Pioneer Natural Resources Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 12 speakers on the call.

Operator

Welcome to Pioneer Natural Resources First Quarter Earnings Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer Rich Daley, President and Chief Operating Officer and Neil Shah, Senior Vice President and Chief Financial Officer. Pioneer has prepared presentation slides to supplement comments made today. These slides are available on the Internet at www. Pxd.com.

Operator

Again, the Internet website to access slides presented in today's call is www.pxd.com. Navigate to the Investors tab found at the top of the webpage and then Select Quarterly Results. Today's call is being recorded. A replay of the call will be archived on the www.pxd.com through May 27, 2023. The company's comments today will include forward looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Operator

These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward looking statements. These risks and uncertainties are described in Pioneer's news release on Page 2 of the slide presentation and in Pioneer's public filings made with Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer's Senior Vice President and Chief Financial Officer, Neil Shah. Please go ahead, sir.

Speaker 1

Thank you, Joelle. Good morning, everyone, and thank you for joining us for Pioneer's Q1 earnings call. Today, we will be discussing our excellent Q1 results driven by our strong oil production and fortified capital return strategy. In addition, we will discuss the resilience of our free cash flow generation at various oil prices, which is underpinned by our best in class margins and unmatched high return assets in the Midland Basin. We will then open up the call for your questions.

Speaker 1

With that, I will turn it over to Scott.

Speaker 2

Thank you, Neil. Good morning. As you all saw in the news, I announced yesterday that I will retire as CEO of Pioneer beginning January 2024. Our President and Chief Operating Officer, Rich Daley will assume the role of CEO at that time. Rich has been with Pioneer and our predecessor company for over 30 years from a $500,000,000 company to over a $50,000,000,000 company And has served in various executive leadership roles and is uniquely positioned to lead Pioneer forward.

Speaker 2

I'm proud of the success that Pioneer has achieved in its 26 year history, as well as key accomplishments over the previous several years. With consistent focus on the Permian Basin, we have formed the largest contiguous acreage position in the Midland Basin, supported by successful integration of 2 acquisitions during 2021, and I have full confidence and our modifications we made last year as we're seeing early indication of great results with our Q1 results. Our methodical approach and highly efficient development program has positioned Pioneer as the most active driller and largest oil producer in the state of Texas. I'm especially proud to have led the independent transition to a free cash flow model that focuses on return of capital to shareholders and further strengthens our balance sheet. I've taken great pride in leading the efforts to reduce flaring intensities in methane and CO2 emissions in the Permian Basin and its contribution The more sustainable practices throughout our industry.

Speaker 2

Building on this foundation, we are one of the first U. S. Operators to join OGMP, the Only Gas Methane Partnership 2.0, demonstrating our ongoing commitment to sustainable operations. I'm excited for Rich's continued leadership of Pioneer as CEO in 2024. I will now discuss our Q1 results going to Slide number 4.

Speaker 2

During the Q1, Pioneer generated approximately $950,000,000 in free cash flow, contributing to a base plus variable dividend $3.34 per share $500,000,000 in share repurchases completed during the quarter. This strong return Capital was supported by efficient operations and oil production near the top end of our Q1 guidance range. Fortifying our return of capital, we increased our quarterly based dividend by 14% and refreshed our repurchase program with a new $4,000,000,000 authorization. Going to slide number 5. 1st quarter results, as we discussed on the previous slide, Pioneer delivered strong first quarter production with both oral and Total production near the top end of Q1 guidance at 361,000 barrels of oil per day and 680,000,000 barrels of oil equivalent per day.

Speaker 2

We continue to focus on efficient operations, maintain low horizontal lifting costs that support our top tier margins and significant Free Cash Flow Generation. Now over to Rich.

Speaker 3

Thanks, Scott, and good morning, everybody. I'm going to turn and start on Slide 6, where you can see the development of our high return assets, peer leading margins is expected to generate approximately $27,000,000,000 of free cash flow over the next 5 years at $80 WTI. As Scott mentioned, we are modifying how we return free cash flow to improve our financial flexibility and balance sheet, while also maintaining significant return of capital to shareholders. The modified framework provides the flexibility to allocate capital returns after the base dividend between variable dividends and share repurchases based on what provides the best value for shareholders. Under the refined capital framework, 75% of our quarterly free cash flow starting with the 2nd quarter will return to shareholders through a combination of base dividends, variable dividends and opportunistic share repurchases.

Speaker 3

A strong and growing base dividend remains our highest return of capital priority. In total, 75% of our quarterly cash flow will be directed towards capital returns, while the remaining 25% Will be used to increase financial flexibility and further strengthen our balance sheet. As you can see from the slide, we expect to return a significant amount of free cash flow to investors over the next 5 years. Turning to Slide 7, we are further strengthening the foundation of our capital return strategy by increasing our quarterly base dividend by 14% to $1.25 per share or $5 per share on an annualized basis. This increase is incorporated into this quarter's base plus variable dividend that will be paid in June and reflects the 6 consecutive years of base dividend increases.

Speaker 3

With this increase, our base dividend yield of greater than 2% Surpasses the average S and P 500 dividend yield. Turning to Slide 8. During the Q1, Pioneer repurchased $500,000,000 of stock at an average price of $206 per share, demonstrating our willingness to step into the market during dislocations such as we saw in March. In total, Pioneer has repurchased $2,100,000,000 in equity since the beginning of 2022, reducing shares outstanding by approximately 4%, which has benefited long term shareholder returns and per share metrics. Further enhancing our strong shareholder returns, the Board of Directors has approved a new $4,000,000,000 share repurchase authorization, providing additional capacity to return Capital through opportunistic share repurchases.

Speaker 3

This replaces the previous authorization, which had $1,900,000,000 remaining. Turning to Slide 9, Pioneer's return of capital framework, which returns at least 75% of quarterly free cash flow, remains amongst the strongest when compared to peers as illustrated by the graph on the left. Our modified framework provides the flexibility to allocate capital returns after our strong base dividend between variable dividends and share repurchase based on what provides the best value for shareholders. This peer leading return capital strategy is sustained by our disciplined reinvestment rate and our deep inventory of high rate of return wells. Turning to Slide 10.

Speaker 3

The graphic on the right illustrates the compelling free cash flow generation that our program is expected to produce over the next 5 years at various oil prices. The combination of our world class assets, top tier margins and moderate oil growth generates cumulative free cash flow of approximately $27,000,000,000 through 20.27, assuming an $80 WTI oil price. As you can see, our return of capital framework is expected to return about approximately 40% of our current market cap to shareholders during this same timeframe, also at $80 Even at $60 WTI, our program is expected to generate approximately $13,000,000,000 cumulative free cash flow over the next 5 years, demonstrating the durability of our program even at lower oil prices. Our robust and durable free cash flow generation, paired with our commitments to substantial capital returns, delivers compelling value to shareholders through cycle. Turning to Slide 11, You can see here that we are reiterating our 2023 outlook with full year production and capital guidance remaining unchanged.

Speaker 3

The company plans to deliver 2023 full year oil production ranging from 357,000 barrels to 372,000 barrels of oil per day and total production ranging from 670,000 to 700,000 barrels oil equivalent per day, resulting in moderate production growth consistent with our investment framework. With our drilling, completions and facilities capital budget of $4,450,000,000 to $4,750,000,000 and our Exploration, Environmental and Other Capital Budget of $150,000,000 to $200,000,000 are unchanged. As we've discussed previously, Key projects within the Exploration, Environmental and Other category include exploration drilling of 4 wells targeting the Barnett and Woodford formations in the Midland Basin as well as continued appraisal of our enhanced oil recovery project. Based on the midpoints of our capital and production ranges, At strip pricing, we expect to generate greater than $4,000,000,000 of free cash flow in 2023 from approximately $9,000,000,000 of projected operating cash flow. Turning to Slide 12, you can see it provides additional detail on our 2023 capital program.

Speaker 3

During 2023, we are expect to operate between 20 4 26 drilling rigs and place between 50530 wells on production. Our 2023 drilling and completion activity continues to be distributed across our large and contiguous Midland Basin acreage position with approximately 3 drilling rigs operating in our joint venture area in the South. This unmatched acreage position provides scalable operational advantages such as drilling and completing our 15,000 plus foot laterals with greater than 100 of these wells expected to be placed on production throughout the year. We also benefit from the continued utilization of Simulfrac operations as well as localized sand mines, which both reduce costs and provide incremental operational efficiencies. Additionally, our significant water infrastructure provides a diversified disposal and reuse network that Turning to Slide 13.

Speaker 3

As previously discussed, we are continuing to realize improved earning strong productivity from drilling our 15,000 foot lateral wells. Developing these long laterals drives significant efficiency gains that reduce capital costs with drilling and completion savings of approximately 15% per lateral foot. The combination of these savings and strong productivity drive increased returns with IRRs increasing by more than 20 percentage points when compared to a 10,000 foot lateral. To date, we have identified more than 1,000 locations for long lateral development supported by our highly contiguous acreage position and expect more than 100 of these wells to be placed on production in 2023. Turning to Slide 14 and looking at the chart on the left, you can see Pioneer's peer leading completions efficiencies and multiyear track record of Efficiency Improvements.

Speaker 3

We are now operating 3 full time simulfrac fleets, which continue to be a major contributor to our high efficiencies and cost savings. Additionally, during the Q2 of 2023, Pioneer will add its 2nd localized sand mine for completions operations. The use of localized sand is providing average savings of approximately $200,000 per well, principally due to reduced trucking costs resulting from the mine's close proximity to our wells. Pioneer expects 100% of our completions placed to be either electric or dual fuel powered by the second half of twenty twenty three, both reducing emissions and capturing cost savings opportunities based on fuel prices. Turning to Slide 15.

Speaker 3

You can see on the left, Pioneer has the deepest inventory of high return Permian drilling locations when compared to peers. This 3rd party analysis presents Pioneer as a premier independent oil and gas operator across North America with decades of high quality inventory in the core of the Midland Basin at breakeven oil price of less than $50 WTI. With that, I'll turn

Speaker 1

it over to Neil. Thank you, Rich. Now starting on Slide 16. The combination of our low cash costs and strong realizations generated peer leading cash margins for the full year of 2022. While our strong price realizations were driven by our oil weighted production, our low operating costs are a function of our unmatched infrastructure and efficient operations.

Speaker 1

These best in class margins underpin our strong free cash flow generation, leading to significant capital returns to shareholders, both of which we have highlighted this morning. Turning to the next slide. Pioneer continues to offer a compelling investment case for shareholders, considering the combination of strong corporate returns and an inexpensive valuation. As you can see, our projected ROCE continues to be one of the highest in the S and P 500 for the 2nd consecutive year. We believe our strong corporate return profile when paired with our discounted valuation provides a highly attractive opportunity for investors.

Speaker 1

And with that, I will turn things over to Rich.

Speaker 3

Thanks, Neil. I'm going to start on Slide 18, where you can see we continue our commitment to sustainable operations, highlighted by our partnership with NextEra Energy and joining OGMP 2.0 in 2022. Additional detail related to our sustainability efforts and their impacts on our business can be found in our 2022 sustainability report and climate risk report. You can find these reports on our website. Turning to Slide 19.

Speaker 3

Pioneer's ongoing sustainability efforts continue to benefit our emissions intensities, which can be seen in the graph by Pioneer's relative position globally. Pioneer continues to provide low emission barrels to the market, producing some of the most sustainable barrels in the world behind only Norway on a CO2 intensity basis. When combined with our low breakeven oil price, Pioneer provides exceptionally resilient production that we expect will have a place in the global market for decades to come. Including on Slide 20, you can see Pioneer's key characteristics, which support our commitment to creating value for our shareholders. And with that, Joel, we'll turn or open up the question or the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Sheffield.

Speaker 4

Sheffield.

Operator

One moment please for your first question. Your first question comes from John Freeman with Raymond James. Please go ahead.

Speaker 5

Good morning, guys.

Speaker 3

Hey, John. Good morning, John.

Speaker 5

And first off, congrats, Scott, on a very well earned Pending retirement, Rich, congrats as well on the pending promotion. First thing is on the Refinement to the shareholder return framework. I'm assuming there was a pretty aggressive sort of outreach with investors and the feedback From them sort of drove this decision, maybe you could just kind of talk to that as well as maybe if there's going to be some sort of I guess a framework in place on when you all determine whether it makes more sense to lean into buybacks versus dividends each quarter.

Speaker 3

Yes, John. Thanks for the question and thanks for the congrats too. So much appreciated. Yes, really we had we have canvassed our shareholders as we've talked about in previous over the last couple of months. But really what kind of led to the change in the framework was, one, it really allows us to improve our financial Flexibility and strengthen our balance sheet, while continuing to deliver peer leading returns to capital shareholders.

Speaker 3

So and it also provides flexibility to continue to allocate capital between variable dividends and opportunistic share repurchases. So that was a big feature of what we wanted to accomplish too. And then the 3rd piece is really with the greater liquidity. It really supports our intention of reducing gross debt through time and provides the ability to repurchase incremental shares at times of major market locations like we saw in March. So we think it's a good refinement to the plan.

Speaker 3

And really to your second question on what will be the distinguishment between Variable versus buybacks, it's really a conversation that from those conversations that was clear that Last few months that our investors do like the variable dividend and it remained an important part of our method through which we return capital. But we want to also be able to continue to repurchase shares on an opportunistic basis when we see attractive value. And so as you can imagine, that's really based on many factors that we evaluate when identifying that opportunity. It's not formulaic in nature, But generally includes looking at our internal NAV at multiple different prices. It takes a look at what's happening in the marketplace.

Speaker 3

You can imagine what's happening in the macro environment. It's really one of those things that when we'll assess, taking all those factors into account to say what's opportunistic at that time. So hopefully that helps, Sumit.

Speaker 5

It does. Thanks, Rich. And then just my last question. You detailed The big efficiency gains you all continue to make on Slide 14. And I'm just trying to get a sense if During the quarter, the 120 TILs that you all had or POPs during the quarter sort of implies kind of a steady cadence all year on POPs to get to kind of the midpoint of that till range.

Speaker 5

And I'm just curious if kind of that's Ahead of schedule what you all saw in the Q1, you added the 3rd Simulfrac fleet. If maybe we should assume that those efficiency gains keep maybe pushing the tilt or POPs toward the higher end of that range. Obviously, a first class problem, but just trying to think about the cadence on the POPs for the rest of the year.

Speaker 3

Yes. No, I think the cadence is pretty flat quarter over quarter throughout the year. So I think you're exactly right. The 120 Wells we put on production is you're going to see something similar for each of the quarters going forward. So pretty much in accordance with plan And on schedule with the plan, so really just as we would have expected it.

Speaker 5

Thanks again, Rich.

Speaker 6

You bet.

Operator

Your next question comes from Neil Mehta with Goldman Sachs. Please go ahead.

Speaker 6

Yes. Congratulations, Scott, and Rich, Congratulations to you too. I wish you well in the new role. The first question is just there's been a lot of talk around consolidation, both around buying stuff and potentially putting Pioneer up for sale. And I don't want to get down the path Rumormongering, but I think for the investors on the call, any color you can provide on how you guys think about value creation through M and any update on your thinking around this.

Speaker 6

Yes, Neal. I'll start with

Speaker 2

the general Answer, then let Rich talk about his thoughts on M and A in the Permian Basin. Obviously, in regard to the Past stories that have been out in the media. The Board will always do what is in the best interest for shareholders. I think that's obvious from our standpoint from myself and our Board. I'll let Rich comment on what he thinks of M and A activity in the Permian Basin.

Speaker 3

Yes. Thanks, Scott. Neil, I'd say, as we've talked about, our primary focus is executing our development program and delivering strong results. So that's kind Priority number 1, but really on an ongoing basis, as you've seen us do in the past, we will continue to add to our Tier 1 acreage position Through trades and through small acquisitions that provide the ability to increase our lateral lengths and provide higher depth of inventory. So that's really the Primary focus, we'll continue to look at things that are contiguous around us, just because we think that is key to adding efficiencies longer term.

Speaker 3

That's really our focus is those type of bolt on things that add incremental inventory and lateral length.

Speaker 6

And a follow-up for me is just Rich, as you take over the helm, What are the 2 or 3 strategic priorities that you're really focused on here as you build Pioneer for the next slide of the future.

Speaker 3

Yes. Thanks, Neil. It's really consistent with what we've developed working over the last Couple of years, and we've put the strategy in place, the plan in place. And so our focus internally for the management team and really our 2,100 Employees is execution. So that's what we're focused on is developing our resource out there and returning significant cash flow to shareholders.

Speaker 3

So that's really what We're focused on and we'll continue to be focused on.

Speaker 6

Thank you.

Operator

Your next question comes from Charles Meade with Johnson Rice. Please go ahead.

Speaker 4

Good morning, Rich, Scott and Neil. And I want to begin by Scott saying, I will miss your willingness to share your unvarnished views on the wool markets. And Thank you for joining that over the last several years.

Speaker 2

I appreciate it. Thanks.

Speaker 4

Yes. So Rich, going back to I think the first question you had about your this is the Framework and metrics you guys use on evaluating The attractiveness of the buyback. I think I heard you say that you have an internal NAV that you look at At various different prices, is that not I recognize that there's not going to be you already said it's not formulaic, but Is that the framework that we should think about you guys using or are there other frameworks or metrics that come into play?

Speaker 3

I'd say that's the main one. I mean, we assess NAV, dollars 60, dollars 70, dollars 80, dollars 90 price outlooks. And so, but you had to take that Obviously, what do you think the macro outlook is? What do you think the long term view of supply and demand looks like? And where do you see oil prices going over time?

Speaker 3

So it's the combination of all those things that really is the assessment that goes into that.

Speaker 4

Got it. Thank you. And then Yes. When I was looking at your results last night, I noticed that it's been 3 quarters now that you guys have returned More than 100 percent of your free cash flow to shareholders. And actually, if you go back to 2Q 'twenty two, it was 95%.

Speaker 4

So I'm curious, what is the is that a streak that we should expect will continue? Or is there going to be more some mean reversion back to that 75% number? What's your expectation in the path and what's going to guide that?

Speaker 3

Yes. Great question, Charles. I think it's really as we talked about is that framework of the 75% is That we're committing to return to shareholders, but the other 25%, we do think it's important to continue to improve the balance sheet Over time, and that's not to say we can't use that for opportunistic times like we saw in March that we can use the balance sheet to buy back more stock. But we think a long term framework For the company, the 70five-twenty 5 is a good split and allows us to reduce gross debt along the way.

Speaker 4

Got it. That's helpful insight. Thanks, Rich.

Speaker 7

You bet.

Operator

Your next question comes from Scott Gruber with Citigroup. Please go ahead.

Speaker 7

Yes, good morning and I'll echo the congrats all around.

Speaker 8

Hi, Scott.

Speaker 7

So I have a question on your outlook for capital efficiency improvement. You seem to be in a somewhat unique position in that over the next 12 months, your well productivity should be improving while your well cost should actually be deflating. As we think about overall how much capital efficiency improvement you could see, I'm thinking about if You stack the improvement in well productivity on a percentage basis this year on top of the potential improvement in well costs On a percentage basis that you could see over the next 6 to 12 months, how large could that sum be?

Speaker 3

Great question, Scott. And I think we'd reiterate that we're very pleased with our Q1 performance and strong well performance and really the operational Sheffield. We accomplished during the quarter. The initial changes that we've made to the program are starting to materialize into our Production, obviously, the most of that is still second half weighted as we talked about on prior calls. So, but excited about where we're seeing productivity go.

Speaker 3

On the capital efficiency side, really hats off to our teams across the company that are working on improving efficiencies. So adding the extra simulfrac doing more longer laterals, the localized sand mines, our water distribution, all those things that we've been working on for many years That is going to help improve our capital efficiency. So thanks to the hard work of all those people, we've made Significant progress and expect to make more progress over the course of the year. So I think everybody is working hard to make that happen.

Speaker 7

Got it, got it. And just focusing on the well cost side because obviously a number of initiatives you just mentioned, but we're also starting to see initial signs of Some deflation at the leading edge of service costs here. I mean, do you think those 2 combined could be pushing kind of Yes, 10% deflation in well cost as we kind of entered 2024 and all the contracts reset?

Speaker 3

It won't be lack of trying on our part, I can tell you that. But on the inflation front, we're still seeing While things have moderated, the pace of change is slowing. So that's a positive. We're not seeing Substantial decreases in a couple of items. We've seen some declines.

Speaker 3

So it's still early to tell where that's going to head. I'm hopeful that We'll see some deflation over the course of the year, but it's still too early to make any changes at this point because we're kind of level of where we would have anticipated, but Signs are starting to look positive on the inflation side. So hopefully that bodes well as we move into 2024 that we can see both the work internally that we're doing from efficiency gains, But some a little deflation will help well cost as we move to 2024.

Speaker 7

Got it. Well, stay tuned. Appreciate the color. Thank you.

Speaker 3

Thank you.

Operator

Your next question comes from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 8

Good morning, guys. Just a couple to follow-up on that. Scott, you and Rich were talking about the vertical integration. I'm just wondering, Could you talk maybe

Speaker 9

a bit more about that? Are you going to try

Speaker 8

to contract more sand kind of maybe just in on vertical integration if there's other

Speaker 3

Sure. The main thing from we've got our program Fairly well locked in terms of all the needs that we have for 2023. And we stagger our contracts like I've talked about in the past just from a supply chain standpoint to make sure you're not renewing anything on an annual basis. But we're not we've got Adequate sand capacity, obviously the localized sand mines are helping with that. So that's been and plus is a cost saving, it's savings about As I said, dollars 200,000 per well.

Speaker 3

The simulfrac saves about $200,000 per well as we've added that fleet. So all those things that The teams are working on and plus we're lowering our emissions by moving to more dual fuel. Those things are helping as well in terms of lowering our emissions and lowering costs. So the teams are really doing an excellent job of making sure that we have the supplies that we need and Improving upon them with efficiencies and then lowering costs as we can best we can in an inflationary environment.

Speaker 8

Great answer. And then just my follow-up on the full stack development. Could you talk about just what the typical pad size is now? And It seems like you're making really good progress on what you started late last year. Could we see some upside on that potentially later this year?

Speaker 3

Like I said, we're very encouraged about how the Q1 has gone. You can see from Q2 guidance that we're continuing to see the benefit going forward. So we're real pleased. No change in our guidance as we've talked about 1 quarter and but everything is moving well on that front. So we're happy about that.

Speaker 8

Very good. Thank you all.

Speaker 3

And Oliver, on our average pad side, sorry, that part, is basically around 5, if you look at that on Across our portfolio, it's about 5 wells per pad is the average.

Speaker 8

Okay. You'll stay on that. Are there some I guess I should ask, are there some real Large pads ahead that we should think about that might cause a little bit of lumpiness or you'll stick to pretty much on that 5, 5,000,000 average?

Speaker 3

You're right, there are some bigger pads here and there, but they're spread pretty evenly across the year, so you won't see too much lumpiness from that.

Speaker 8

Very good. Thank

Speaker 3

you. You're welcome.

Operator

Your next question comes from Derrick Whitfield with Stifel. Please go ahead.

Speaker 7

Thanks. Good morning all. Also, ditto on that congrats to Scott and Rich.

Speaker 3

Thank you.

Speaker 7

Thanks. Referencing Slide 19. I wanted to ask a bigger picture question on the value of low carbon intensity production. In this environment with an ever increasing focus on de carbonization, do you sense or could you envision a day where your production would receive a downstream premium for its carbon intensity Profile, parts and quality adjustments.

Speaker 3

It's a great question and we'll have to see how the market evolves on that front. Yes. What I can tell you is the things that we are focused on is continuing to lower that emissions. And then also, we're in the process of putting methane sensors Across over 80% of our tank batteries that should be done mid part of this year, the things that we're doing with NextEra on the wind farm, We're working with our transmission providers to get substations out there where we can move more of our operations to high line power, both drilling completions and Facilities as we move into 2024, 2025 time period. So there's a lot of great work being done across the company that really helped Lower those emissions either further going forward.

Speaker 3

So, whether that gets a premium value is a question, but we believe internally it's just the right thing to do.

Speaker 7

That makes sense. And then with respect to your exploration budget, could you perhaps better detail the results from your EOR pilot last And your testing plans for this year?

Speaker 3

Yes, it's still early. I mean, last year we had one cycle test that was Gave us some positive indications, but we need to do more of those cycles and that's what we're doing this year and we're just kicking that cycles off As we speak. So it will be later this year, early next year before we have the results on that. But so far things are encouraging, but We really need to do more cycles to understand what the full cycle economics will look like on that project. So more to come.

Speaker 7

Maybe just one clarification, how extensive is the area in which you're testing and what kind of spacing do you have with those patterns?

Speaker 3

It's a historical area that we've done into. It's not a big area. It's 3 wells, I think, in Two different zones is where it's being tested. So still an early development of an area that we have 100 percent ownership.

Speaker 7

Terrific. Thanks. That's all for me.

Speaker 3

Thank you.

Operator

Your next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Speaker 9

Thanks. Good morning and again congrats to both of you all on your next endeavors. And maybe first to start just on the topic. Scott, just if you could give us a view of like why the Accession plan kind of announced now. Do you feel confident in the trajectory of Pioneer?

Speaker 9

I know there's been a lot of volatility on the oil side as well as Just a lot of, I guess, questions last year on operational performance, but of the wells. But Can you give us a sense of why you think now is the right time to step back?

Speaker 2

Yes, thanks. When I came back, I first started off with a a 3 year assignment to accomplish all of my goals, including succession. I started working on succession back in March of 20 19 when I first month I came back. Obviously, COVID delayed things. And then we got into a with our 2 consolidation in the Midland Basin with our 2 large acquisitions.

Speaker 2

And I told the Board last year that I was really focused on this year. So it started last year and especially with outperforming significantly first quarter With our production and our modifications that we made last year, I have full confidence in the fact that we're going to have significant uplift over the next several years. It was just a good time. So I've been doing this for over about 35 years running the public company and its predecessor. I'm almost 71, and so it's time to enjoy the rest of life.

Speaker 2

So as simple as that. So nothing else involved.

Speaker 9

Fair enough and it's well deserved. Maybe kind of going back to the new shareholder return strategy, I know that you all emphasized that there's The other 25 percent, it sounds like the first priority is balance sheet, but then obviously opportunistic buybacks. Just a little bit of commentary And this sort of reducing gross debt would be helpful. Obviously, if we use your and just go to Slides in terms of your 5 year free cash flows. I mean, if we pick a $70 oil price, I mean, that would more than get you to net debt 0 or actually Negative net debt number.

Speaker 9

Do you think long term that's in the cards where you get down to 0 net debt or do you think there's an optimal level of leverage on the balance sheet.

Speaker 1

Hey, Scott. It's Neil. How are you? Good. You're thinking about I think the right way.

Speaker 1

I mean, it's our goal and we've always said it. We believe in a Pristine balance sheet and one that provides us durability during the down cycle as well as provides us operational and financial flexibility during an up cycle. So it's our intention to continue to pay down gross debt as it comes due. Now if you think about gross debt versus net debt, We're going to continue to drive down gross debt, but we have some long data maturities that have a very low interest associated with them. I think it's 2030, 31s, those will more likely to not remain outstanding.

Speaker 1

But as our gross debt comes due, it would be our intention to pay it down.

Speaker 9

Okay. And then just out of curiosity, if I could tack on a half to that. You all did issue debt here recently when you had the 750 note come in Why do that? Is that was that more of a temporary bridge to you get a bigger quantum of free cash flow?

Speaker 1

No, I think that's the right way to think about it. Our intention is to reduce absolute gross debt through time. As you know, however, given our 2022 year end cash balance and then you saw the recent downtick in commodity prices during the Q1. We thought it was prudent to finance the maturity that's due here in May. And so that's exactly the reason.

Speaker 1

I view it more of a temporary bridge as we shore up free cash from the balance sheet as Rich alluded to earlier.

Speaker 7

Thank you.

Speaker 6

Of course.

Operator

Your next question comes from Bob Brackett with Bernstein Research. Please go ahead.

Speaker 10

Good morning and please pass my congratulations on as well. In terms of self sourcing sand, can you talk to the state of the art In sand, in terms of grain size, moisture, crush strength, what's sort of the leading edge of what the industry is doing?

Speaker 3

Good question. I don't know I have all the specific details on each of that, but really we've been using West Texas sand out there for really probably bigger part of a maybe not a decade yet, but it's been a long time and it's worked great. So really That's really what we're continuing to use in the localized sand mines are exactly the same as what we were getting further west. And it's worked out for the whole industry. I mean, is there the capacity is pretty well spoken for today.

Speaker 3

That's why these localized sand mines Are helping with providing incremental capacity, but it's the best and cheapest source available as you know bringing White sand or other resin coated sand or other proppant type sand is just more expensive and this is Yes, highly efficient and highly cost effective to use in the field.

Speaker 10

Very clear. A quick follow-up. Going back to the pad size of around 5 wells, how do I think about the geometry between zone development, which sort of Intuitively seems would be larger pads versus that 5 well number that's kind of flat through the year. How do I think about that?

Speaker 3

Yes. Each of across the basin is the full stack development looks differently and you do them in a half section Type development. And so there may be it will look different by zone. It's typically, as you've seen on most of the diagrams that we had in charge, If you want to kind of equate it to looking like a wine rack, that's how it's done. And then we just we'll go from one pad to the next pad, But they may be we use this term like mow the lawn.

Speaker 3

It's just sequential. And so just think about that's how we're developing it across the field in these significant areas. It really just helps from an efficiency standpoint to keep rigs in one area.

Speaker 10

Yes. Okay, that's clear. Thanks. Sure.

Operator

Your next question comes from Doug Leggate with Bank of America. Please go ahead.

Speaker 11

Thank you, guys. I seem to not be able to get my My queuing up done properly. Thanks very much for getting me on. Scott, your stock is up 50% since you came back. Congratulations.

Speaker 11

You did lead that change in mindset for the market and won't deserve its retirement. Same to you, Rich. You put up with my Nuance question, so it wouldn't surprise you that I've got a couple of Nuance ones today. So congrats to you too. My first question is this.

Speaker 11

Guys, I want to go back to the Neil's question about M and A, but I want to be very specific about this. Your pattern has been not to comment on market speculation, but you did with Range. You broke the precedent. The language in that press release was very specific. It said we are not contemplating a significant business combination.

Speaker 11

Should we assume from that then that, that would preclude any discussion with ExxonMobil?

Speaker 2

Doug, the primary reason we responded to and issued a press release on the range Was due to the obviously significant reaction that we got back from our shareholder base. Obviously, there was nothing going on, and we reacted. And so we saw our stock get down to about 180. So that's the reason only reason we went away from no comment. You're going to see us always use that no comment like every other company does in every other industry.

Speaker 2

And as I said before, the Board will always do what's in the best interest for shareholders.

Speaker 11

So you did not have discussions with a larger company or you did?

Speaker 2

I've already answered the

Speaker 3

question, Doug.

Speaker 11

Yes. No, I was referring to the not contemplating a significant business combination, but I understand. Thanks, Scott, for I know it's a tough one, tricky one to navigate. My follow-up though is on the capital return framework. And I really want to get to the issue of value because we all know that the commodity is a key into But once again, you guys have talked about compelling valuation in a number of different context.

Speaker 11

You've also told us what your free cash flow guidance is $4,000,000,000 And with one of the best inventory debts in the industry, annuitized that it's under your current market Capitalization. So I want to understand how you define value. And more importantly, if you really believe that, why wouldn't you forgo the variable dividend and just focused on buybacks.

Speaker 1

Hey, Doug, it's Neil. I'll take that one early. So I'll start with off. Look, I've known you for what close to 20 years. I think you were always on my first calls when I was on the buy side.

Speaker 1

We've had great discussions. Oftentimes, we've had Different opinions and different thoughts, which again is what makes the market. I think we would describe value and look at value Multiple different ways. I think it's more than just dividing the free cash flow by the weighted average by your WACC. I think many on this call, the investors that Look at our stock and assess the value and the stock assess the value of the overall market.

Speaker 1

Also look at it very differently and through multiple lenses, not just one singular lens. So I'd say that's one of the ways that we perceive value is not just by 1, but by multiple lenses. And then the last slide is one of those views that we have. We look at ROCE, CE. The commentary that we've gotten from our shareholders is, look, focus on your return of capital employed, your corporate returns, and you can see that we're leading the sectors.

Speaker 1

Now, you look at that sector, the sectors and you look at the valuation of the sectors within the S and P 500, we see somewhat of a mismatch there and I think many would agree with that statement. You can look at valuation, relative valuation, sector valuation. We also believe looking at the inventory, duration of inventory, the quality of inventory That also comes to bring to bear, looking at the margins, all of that. So I would say valuation, from our perspective, and I think many on this call, it's More than just one singular metric, but encompasses more of a greater mosaic. So in terms of your question now, the variable versus the buyback, you've seen that edited the modified capital return framework and part of that now contemplates, as Rich alluded to, share repurchases as well.

Speaker 1

So we see great value in our equity and it is now a defined part of our capital return framework.

Speaker 11

So Fair but balanced response, Neil, and I do respect our relationship over the years. Thanks so much.

Speaker 1

Of course. Thanks, Doug. Appreciate it.

Operator

There are no further questions at this time. Please proceed.

Speaker 2

Again, thank you all very much. Look forward to seeing you in his last calls. So again, thank you. Again, congratulations to Rich. Thank you.

Speaker 3

Thanks, everybody.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Pioneer Natural Resources Q1 2023
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