Pioneer announces sale of EFS Midstream Business

Pioneer Natural Resources Company and Reliance Holding USA, Inc. have entered into a purchase and sale agreement with an affiliate of Enterprise Products Partners L.P. to sell their Eagle Ford Shale Midstream business (EFS Midstream) for US$2.15 billion, subject to regulatory approvals and normal closing adjustments. Pioneer owns 50.1% of EFS Midstream and Reliance owns the remaining 49.9%.

Pioneer and Reliance will also benefit from fee reductions under existing downstream processing and transportation contracts with Enterprise in exchange for extending the contract term to 20 years and dedicating additional Eagle Ford Shale volumes to Enterprise. The reduced fees are expected to benefit Pioneer and Reliance over the original terms of the downstream contracts by approximately US$200 million on a net present value basis at 10%. These reduced fees will primarily be reflected as improvements in future realised prices. Enterprise has also agreed to spend US$270 million over the next ten years on new facilities, connections and expansions to support the continuing development of the Eagle Ford Shale resource.

The purchase price for the EFS Midstream business will be paid by Enterprise in two instalments: US$1.15 billion at closing, which is expected to occur early in the third quarter of 2015, and US$1 billion twelve months after closing. After retiring the debt of EFS Midstream of approximately US$150 million, Pioneer’s share of the net sale proceeds, before normal closing adjustments, is expected to be US$500 million at closing and US$500 million one year later. The sale of EFS Midstream is expected to result in a pretax gain in excess of US$725 million to Pioneer, which is expected to be recognised in the third quarter of 2015. Pioneer expects net cash proceeds from the sale to total approximately US$900 million after tax. In addition, the Company will realise its US$100 million share of the reduced transportation and processing fees associated with the new downstream agreements. The sale of EFS Midstream is also expected to enhance Pioneer’s ability to export processed Eagle Ford Shale condensate.

Scott D. Sheffield, Chairman and Chief Executive Officer, stated, “The sale of EFS Midstream will further improve our already strong balance sheet and allow us to strategically redeploy capital to our core, oil-rich Spraberry/Wolfcamp asset in the Permian Basin of West Texas, which we have successfully transformed from a vertical play into a world-class horizontal play. We are currently operating 10 horizontal rigs in the Spraberry/Wolfcamp. Our strong balance sheet, combined with a strong derivatives position for 2015 and 2016, provides us with the financial firepower to ramp up drilling activity on high-return Wolfcamp B and Wolfcamp A horizontal wells during the second half of this year. Average production data from all of the Wolfcamp B and Wolfcamp A wells drilled since early 2013 in the northern Spraberry/Wolfcamp continue to support estimated ultimate recoveries of 1 million boe per well with oil content more than 70%. We will also re-initiate horizontal drilling in the Lower Spraberry Shale interval where production from wells drilled since early 2013 support EURs ranging from 650 000 boe to 1 million boe per well with oil content of more than 75%.”

“Starting in July, we will add an average of two horizontal rigs per month in the northern Spraberry/Wolfcamp through the remainder of the 2015 as long as the oil price outlook remains positive. This additional drilling activity is expected to increase the Company’s 2015 capital budget by approximately US$350 million. The addition of these 12 rigs will have minimal impact on forecasted 2015 production growth of 10%+ due to multi-well pad drilling.”

“During the first quarter of 2016, we are planning to add another eight horizontal rigs, of which six rigs will be in the northern Spraberry/Wolfcamp and two rigs will be in the Eagle Ford Shale. This rig ramp will bring our total horizontal rig count to 36 rigs (28 rigs in the Spraberry/Wolfcamp and eight rigs in the Eagle Ford Shale), which is essentially the same as our horizontal rig count prior to the oil price collapse in late 2014/early 2015. Based on this planned increase in drilling activity, we expect to deliver compound annual production growth of 15%+ over the 2016 through 2018 period.”

“I want to personally thank all of our EFS Midstream employees for the value that they have created for Pioneer shareholders in supporting our successful development of the Eagle Ford Shale. I am pleased that Enterprise will be working with us going forward to build on this success.”

Upon closing of the transaction, Pioneer will no longer receive its share of the cash flow generated by the EFS Midstream business, which was forecasted to be more than US$100 million in 2015. The loss of this cash flow will result in an increase to Pioneer’s Eagle Ford Shale production costs of approximately US$3.00 per boe and total corporate production costs of approximately US$0.75 per boe.

The EFS Midstream business was formed in 2010 to construct facilities to provide gathering and handling services for condensate and gas produced from wells in the Eagle Ford Shale. The EFS Midstream system currently consists of 10 central gathering plants and approximately 460 miles of pipelines. The system gathers and separates produced condensate from produced gas. It also stabilises the condensate, where necessary, and treats the gas. These services are provided for the Eagle Ford Shale upstream joint development operated by Pioneer (Pioneer - 46%, Reliance - 45% and Newpek LLC - 9%) and for various third parties.

Pioneer is continuing to protect the Company’s cash flow through the use of derivatives, including (i) maintaining coverage for 2015 forecasted oil production at approximately 90%, with most of the volumes protected by swaps at US$71 per barrel, (ii) increasing Pioneer’s 2016 oil production covered by three-way collars to 93 000 bpd in recent weeks, (iii) initiating derivatives coverage for 2017 oil production by adding 5 MBOPD of three-way collars in recent weeks, (iv) maintaining coverage for 2015 forecasted gas production at approximately 90% with three-way collars that provide attractive downside protection and (v) increasing Pioneer’s 2016 gas production covered by three-way collars to 120 million btu/d in recent weeks, combined with the 70 million btu/d of gas swaps in place for 2016.

Adapted from press release by Hannah Priestley-Eaton

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