Q2 2022 Pioneer Natural Resources Co Earnings Call
Good day, ladies and gentlemen, and welcome to pioneer natural Resources' second quarter earnings Conference call.
Joining us today will be Scott, Sheffield, our Chief Executive Officer.
Richard Daly President the Chief operating officer.
Neil Shah.
Vice President and Chief Financial Officer.
Pioneer has prepared presentation slides to solve that comments made today.
These slides are available on the Internet at Www Dot P X D Dot com.
Again.
Did she said web site to access the slides presentation for today's call is www dot <unk> dot com.
Navigate to the Investor Investor's tab at the top the webpage and at select Investor presentations.
So information todays conference is being recorded at a replay of the call will be archived on www Dot P X D Dot com through August 'twenty eight 2022.
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 19 that is no.
How do you fight these.
These statements and business.
Prospects of pioneer are subject to a number of risks.
Certainties that may cause actual results and future pitch differ materially from the forward looking statements.
These risks and uncertainties described pioneer's news release on page two of the slide presentation.
And at Pioneer's public filings made with the Securities and Exchange Commission.
At this time for opening remarks, I'll turn the call over to Mr. Pioneer's Senior Vice President.
Chief Financial Officer, Mr. Neil Shah please.
Please go ahead Sir.
Thank you George good morning, everyone and thanks for joining us for pioneer second quarter earnings call.
We will be discussing pioneer strong second quarter financial and operating results and our peer leading return of capital strategy.
We will also detail our best in class margins.
Matched depth of high quality inventory.
Along with our leading ESG strategy, which is also detailed in our recently published 2022 sustainability report we will.
We'll then open the call for your questions with that I will turn it over to Scott.
Thank you Neil good morning.
I'll be starting on slide three.
<unk> delivered strong results generating $2 7 billion of free cash flow in the second quarter.
Additionally, this quarter, we reached our base dividend by more than 40%, which is supported by our high quality assets deep inventory.
Leading margins and strong balance sheet.
This is the third base dividend increase in the previous four quarters.
Represents a greater than 95% increase through the base dividend over the previous 12 months.
Annualized base dividend of $4 40 per share has a yield that exceeds the S&P 500 average at our current share price.
This space increased the quarter's base plus variable dividend resulted in a total dividend payout.
57 per share to be paid in mid September .
But as I've always said, we would aggressively repurchase shares when the market presented opportunities.
Consistent with this we repurchased $750 million since the end of the first quarter, including 500 million during the second quarter, an additional 250 million repurchased in July at an average share price of $2 13.
We are initiating stock buybacks in the fourth quarter of last year. We have retired approximately two 5% of our shares outstanding.
Additionally, we were recently published our 2022 sustainability report, which highlights our focus and significant progress on ESG initiatives, including accelerating our target to end the routine flaring to 2025 and joining the call.
Oil and gas methane partnership to point out.
Pioneer places a high priority on environmental stewardship, it's continued to make progress toward our goals.
Going to slide number four.
Finally, our strong execution continued during the second quarter with total production in the upper half of our guidance range supporting significant free cash flow generation of $2 7 billion.
Our horizontal.
Continues to be low and our strong balance sheet is one of the best in the sector.
Going to slide number five.
We believe that maintaining a strong and growing base dividend is the foundation of our capital return strategy.
And earlier, we have further strengthened our base dividend the significant increase of greater than 40% from last quarter. This material increase is underpinned by our balance sheet strength and durability of our cash flow.
Across commodity price cycles and closer to this increase our base dividend has grown by an average of 95% annually over the previous six years.
This increase in net bring outpaces, both peers and majors over the same period, many of which are cut or suspended their dividend.
Going to slide number six.
Complementing our strong shareholder cash returns through dividends, we continue to repurchase our shares opportunistically.
1.25 billion since the fourth quarter of 2021 and average share price of $2 18.
This represents a reduction of total shares outstanding by approximately two 5%.
Consistent with our statements to be aggressive during market opportunities, we repurchased an additional $250 million of stopped during the market pull back in July at an average share price of two therapy.
As evidenced by the repurchase during July we will continue to utilize TV buy programs to take advantage of market opportunities.
We have utilized one quarter of our current 4 billion authorization, leaving 3 billion remaining.
Going to slide number seven.
We remain committed to our core investment thesis underpinned by low leverage strong corporate returns and lower reinvestment rates.
This delivers all production growth of up to 5% annually and generate significant free cash flow. The majority of this free cash flow was returned to shareholders in the form of base plus variable dividends with total cash returned via dividends, representing approximately 8% of our free cash flow. This compelling cash return is.
Hans via opportunistic share repurchases and continued balance sheet fortification.
<unk>, including second quarter share repurchases, we returned with greater than 95% of our second quarter free cash flow, which equates to an annualized yield of approximately 19%.
Going to slide number eight.
Pioneer's capital return framework remains best in class with a return of capital framework described on the prior slide you can see here pioneers forecasting elite all peers in the percentage of free cash flow being returned to shareholders through dividends and share repurchases.
Yeah.
Going to slide number nine.
Dividends grew cycle pioneer high quality assets low breakeven disciplined growth with up to 5% provides the ability to return significant free cash flow through dividends over a wide range of commodity prices inclusive of the impact of expected cash taxes.
As seen on the graph if oil prices were to average $60 per barrel over the next five years on year shareholders will receive approximately 5% annual yield at current share prices. This yield is over two five times more than the S&P 500 average again that is $60 <unk> flat at.
$100, <unk> flat, which I believe will be the most likely outcome over the next five years as we March forward as demand continues to increase with minimal supply increases the yield is 12%.
So significant upside.
On to slide number 10, the third quarter dividend payments outlined previously resulted in an extremely compelling annualized yield of approximately 15%.
This yield exceeds all peers majors and the average yield of the S&P 500.
Going to slide number 11.
<unk>, 15% annualized giving yield surpasses the S&P 500 average.
By greater than seven times.
Looking beyond our peer group to the broader market pioneers dividend yield exceeds every S&P 500 sector remains higher than any individual company in the S&P 500.
With our double digit dividend yield culinary share repurchases and up to 5% all growth the case for owning pioneer stock is compelling.
I will now turn it over to rich Thanks, Scott.
Morning, everybody I'm going to start on slide 12, where you can see our current full year 2020 production guidance remains unchanged at 350000 to 365000 barrels of oil per day, and 623 to 648000 Boe's per day.
You can see we revised up our 2022 capital to three six to $3 8 billion up from three three to $3 six previously really reflecting the inflationary pressures, we are seeing diesel and steel primarily and to a lesser extent in sand and chemicals and labor.
Our plan is expected to generate greater than $13 billion of operating cash flow, which is up from $10 5 billion at the beginning of the year. So $2 5 billion increase relative to the midpoint to midpoint 250 million on capital. This is going to result in over $9 billion of forecasted free cash flow in 2022 <unk>.
Consistent with our investment framework that Scott outlined we expect modest production growth this year and a reinvestment rate of less than 30%.
Returning the vast majority of our free cash flow back.
Back to investors via dividends and opportunistic share repurchases.
On average our activity level for your remains unchanged, we expect to run 22 to 24 drilling rigs and approximately six frac fleets, which two of those are simulcast fleets.
This will result in placing about roughly 500 wells on production in 2022.
Turning to slide 13.
And thanks relate to the hard work and focus of our teams across the company. We continue to realize operational efficiency improvements are implementation of simulcast its been a great success in both reducing cycle time and Cox as evidenced by the chart on the left we have established ourselves as a leading simulcast operator, having completed the most similar wells of any operator.
As you can see from the right of the on the.
On the right side of the graph the implementation of Simon Frac combined with continued operational improvements have significantly benefited our completions efficiencies we have doubled.
Our completed feet per day since 2018 and are targeting further improvement in 2023 with the addition of a third time will Frac fleet early next year.
Turning to slide 14.
I mean, it was highlights pioneer's best in class cash margins.
Our HIFU oil percent realizations, and our strong marketing arrangements drive top tier price realizations per Boe and when you combine that with pioneers low cost structure as a result of our highly efficient field operations, our low corporate overhead and are inexpensive borrowing cost at below 2% you get pure leading cash margins that support our strong return of capital.
Framework.
Turning to slide 15, this slide really highlights the sustainability of those best in class margins by showing our unmatched depth and quality of drilling inventory.
The third part of that third party data shows the durability of our position with decades of high quality inventory in the Midland Basin.
You can see on the right side that the Midland basin as more than two times, the remaining top tier inventory in the Delaware Basin.
Turning to slide 16, this slide complements the prior slide quite well it matches, our inventory duration with free cash flow per Boe, highlighting pioneers stable position with the longest inventory and highest free cash flow per Boe.
This combination provides pioneer the ability to distribute a significant free cash flow to shareholders for decades consider the quality and depth of our inventory.
With that I'm going to turn it over to Neil.
Thank you rich.
Turning to slide 17 pioneers compelling value proposition is further evidenced through the combination of the two graphs on this slide.
Hi, corporate returns and an inexpensive valuation the graph on the left demonstrates the culmination of our high quality assets casually efficient development, our people and our best in class margins, which drive our strong corporate returns in fact pioneers projected our oce exceeds all other <unk>.
Sectors within the S&P 500 to also include the majors and the broader energy sector Perry.
Pairing the strong returns profile with our discounted valuation on the right graph. We believe result in an extremely compelling and durable investment opportunity with.
With that I'll turn it over to Scott.
Finishing up on slide number 18, leading sustainability plan. We recently published our 2022 sustainability report, which highlights pioneer's focus and significant progress on our ESG initiatives.
The comprehensive report details, our environmental initiatives and targets, including.
[noise] those highlighted on the right side of this slide.
Since our last earnings call, we announced our membership and two O GNP to point out and the addition of a center are named as to our board of directors, who brings decades of investment experience.
We believe that these actions demonstrate our commitment and focus on ESG and further strengthens <unk> position as a leader in the industry.
Our updated system be report can be found on our website and additionally, we expect to publish an updated climate risk report later this year.
Slide 19, just summarizing all of the things that we're doing in regard to enhancing shareholder value. We will now open it up for Q&A. Thank you.
Thank you so much sir.
Ladies and gentlemen, if you have the task of the audio questions. Please press star one on your temple keypad at this time.
Please also sure it can be a function of stop activity due to lower your signal to reach equipment.
Once again, ladies and gentlemen, please press star one to ask a question just possible chance of signal.
Today's first question is coming from Mr. John Freeman, calling from Raymond Jones, Raymond James Sorry. Your line is open Sir.
Good morning, guys.
Yeah.
Hey, John .
Good thanks, a very impressive dividend no specifically I wanted to focus on on the base dividend.
You know a year or so going off first introduced the base plus variable dividend sort of framework.
The outlook was you'll have sort of this.
A couple of percent kind of a rate of growth on the base dividend and obviously helped us dramatically better than that.
Since it was introduced in I guess I'm, just trying to get a sense. Maybe you can just remind us when you all think about.
Where to take the base dividend like how much of this is you know the commodity environment was far better so the balance sheet got rapidly.
Stronger than you would have initially expected versus maybe other things that we wouldn't be as aware of like something about the underlying asset reinvestment rates from changing your view on the mid cycle pricing just anything else that sort of goes into the confidence of that base dividend. So we had some a little.
Better idea going forward, how we should think about that.
Yes, John Great question.
As I said before we believe in a stable and growing base dividend and will continue to increase our base dividend over time.
Materially increased our base dividend in recent quarters, increasing about 95% over the past year, including this 40% increase.
Over the past five years, we've demonstrated our commitment to the base dividend, increasing it by 55 X without cutting in versus spending and like many of our peers. We have the ability to still grow the basically didn't even when stress testing at lower oil prices between 45 to 50 dollar WTO. In addition, I'll finish up by saying we expected.
We continue to increase the base dividend.
Uh huh.
Sensor it with our production growth. So if we're able to grow 5% a year long term you would anticipate a 5% increase in the base dividend on an annual basis.
Great. Thanks, Thanks, Scott and then my follow up question.
Rich last quarter.
You kind of mentioned, how it was actually pretty easy to see how to pick up that that spot Frac crew. When you need it because you all had ready access to things like sand and diesel and I guess I'm just interested in sort of maybe an update as you know three months later here as service companies keep talking about how there.
Pretty much maxed out on the Frac side U S. Frac count has sort of stalled out here over the last couple of months, even though.
Rig counts gone higher and just sort of any updated thought she got allows it still do you think relatively easy for someone like you all to pick up you know crews or are you starting to see a lot more tightness.
I would still I would say, it's generally gotten tighter John yeah over time I, just think you've seen youll continue to pick up a little bit of rig activity and some frac fleets I don't know, there's a lot of spare capacity out there I think there are some new fleets that you've seen in your electric fleets that are coming into the market. Later this year early next year that'll help on the pressure pumping side.
Good.
So I think it's what it caused all of us to do as you move up our contracting timeline for 2023 earlier than in prior years, and so I think all of that work's underway I don't have any concern about pioneer getting the equipment or.
Services that we need or materials, but I mean, it's definitely a tighter market. So we're starting earlier.
Thanks, guys I appreciate it.
Thanks, John .
Thank you Sir.
When I was able to Jenny Y O Y calling from Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning.
Morning, Scott.
First question is on the tank battery expansions.
At work I think you're starting to do that in Q3.
Is there more of that work that needs to be done beyond whatever youre going to handle pretty soon and as that work concentrated in certain areas.
Yeah, Jeanine I would say on your tank battery program is consistent with how we laid it out at the beginning of the year and it really hasn't you know the timing of it hasn't changed we had a little bit of capital that was planned for second quarter, but as you know sliding in the third quarter just for.
Various reasons, but nothing that's impacting production at all.
No nothing new there in our tank battery size is still the same that we've done before we're really just you know really focused on.
Wells that were selecting going into existing tank batteries, where we have excess capacity already so nothing really unusual on the tank battery side and work is I would say just as going on it and as normal as we would've planned at the beginning of the year.
Okay perfect. Thank you.
The second question, maybe we can just move to the Capex number.
So I don't know if pioneer thinks about it in this way or not but some companies they've mark to market. There are 22 budgets based on a certain price outlook and that just kind of helps the analyst understand directionally, how capex could change if prices change oil prices change. So is your updated three six to $3 8 billion budget is that based on.
Certain oil price and do you have an update on what percent of 2022 or 2023 is locked in on price. Thank you.
Sure Janine, Yeah, I would say, we don't pick a specific price, but I didnt get that.
Our capital budget range of $3 63 point. It is you can target around 100 to $120. Brent is where we would generally say that probably fits into.
The biggest variable on that is tied to oil prices is really diesel because it'll fluctuate with that in terms of 2022 capital in terms of locked in you obviously the longer we go through the year. The more of it is locked in I think last quarter I talked about being 60%.
I don't have the exact number but my guess just given where we're at we're in that probably 70% to 80% range at this point, though theres no. Most of it's you know pretty well locked up or on order or purchase orders have been put in place.
In 2023, we're still in the midst of contract. This is still a little bit early I mean, I think just in general as we think about 2023 anywhere you know as I think we've talked on previous.
Calls that are probably going to see another roughly 10% increase for inflation. In 2023 is just based on early indications. It's still early but just for planning purposes, I think that'd be a good number to plan around.
Very helpful. Thank you gentlemen.
Yeah.
Thank you.
Thank you so much.
Ladies and gentlemen, once again, if you have any questions. Please press star one now.
Now, we'll go to Neil Mehta, calling from Goldman Sachs. Please go ahead.
Yeah, good morning team.
Just wanted to build on that last comment around how youre thinking about 2023 and and Scott.
Scott given we.
We have a little bit more visibility it seems on the oil markets into 2023 as we've worked our way through the year do you think it makes sense.
To to grow as in 2023, how are you thinking about the production profile.
At this point and it both for your company and for our for the broader U S E&P industry.
Yeah. Good morning, I'm still very optimistic that the oil price is going to continue to March forward.
With probably more upside than downside demands coming back around the world people are flying more China is going to come back.
And as you know there's not much supply in the OPEC agreement OPEC plus announced it a miniscule increase today.
So you could give us into by the administration.
So important.
Important ammunition.
Even though it was minuscule today.
They just don't have the supply very little left in UAE, and Saudi and so on the basis that oil price will continue to March forward.
Our focus will be on that 5% production growth of oil.
So I see it we enter every iterate downturn. That's a different question, we can actually ratchet back in that regard, but we're still focused on that long term, 5% production on oil and next year should be one of those positive years to do it.
Okay. That's helpful. Scott and then the follow up is around the share repurchase program and you highlighted that you ended up buying back stock here Opportunistically.
In July just talk about your framework around it should we think of this as a level loaded program.
Which supplements the dividend or one where youre going to look to use weakness.
Thank you.
Yeah, I mean, we've averaged about two and a half over the last call. It.
Seven there call. It nine to 10 months, we bought back two 5% of our stock a lot of it is where is in the what I'll call opportunistic.
Obviously, it depends on where share price goes well as I've said in the past, we will always continue to buy a little bit each quarter.
And then with we see pullbacks as Willie will step up in that.
It's really our policy and we'll continue to do that we've got the firepower and the free cash flow to be able to transact.
Transact on that policy.
Thank you Scott.
Thanks, so much sir.
The next question is coming from their trial done is calling from <unk> Securities. Please go ahead.
Good morning, I'm, just going to piggyback on that last one on the share repurchases.
You characterized it as opportunistic.
You know, obviously oil pulled back and so did the stock. So I'm. Just wondering is it a is it a nominal level of the pioneer stock or it was pioneer in a better relative position during the pullback or is it just maybe your upper distributor are optimistic.
Just a view on oil so anytime oil pulls back it kind of creates opportunity.
Yeah, I mean, it we do run our net asset value in the company, we'd like to get a great return when we go into the market and buy a lot of the stock like we did obviously, we don't know where the stock is going to go based on the marketplace. So our policy is continue to buy back a little.
Each quarter.
And if for some reason, we see big dips, whether it's in oil or something else effect in the marketplace.
It will be more aggressive like we have so.
Hopefully that's about as simple as we can.
I describe it.
It sounds good and then maybe shifting gears one across your acreage position.
Could you maybe talk about you know what the returns look like and in Martin and Howard versus your southern position versus your JV and maybe how that will influence where you run.
The rigs, but maybe at the end of this year and next year.
Yeah, you can really look at where we have our rigs running across the basin and <unk>.
Spread the rigs out to manage water and supplier moving things around and so but our returns when you look at our top tier inventory and the depth of our inventory that we've talked about it it's really consists.
Consistent across the basin for our acreage position. So we're just less in that regard that were tier one acreage.
15000 locations 20 year inventory and so they just don't look that different amongst locations. So that's really how we have you've seen in the last couple of years, we're not concentrated in any one area, we better activity out in the returns are great and all of those areas.
Okay. So is it fair to say that the infrastructure is more important because of the kind of uniformity of the returns.
Well, yeah, that's why I didn't really separates pioneers the water infrastructure that is really the ability to move water around so we can actually add, albeit Tucson will frac fleets consistently and get to the third time will frankly is really that infrastructure allows us to do it at scale, where others you know or may not have to really do that at the same scale.
Thanks, that's all from me.
Sure.
Thank you and what's your.
Well now go to Derrick Whitfield, calling from Stifel. Please go ahead Sir.
Thanks, and good morning all.
For my first question I wanted to touch on inflation reduction Act, which could.
Could be voted on this week.
Focusing on the minimum tax and methane key components could you speak to the expected implications for pioneer.
Yeah, I'll hit the methane being Neil can talk about the tax thing, but really we've looked at it and you know if passed we don't accept the proposal of a material impact on tire because based on our goal is continue to reduce methane emissions and where we are on that curve, so far and what we've done to reduce emissions will continue to monitor.
But you don't feel that we're well positioned to reduce our emissions intensity with our productions, we've laid out in our sustainability report and our goals that we outlined this morning, so really not expecting anything material based on our analysis of it so far.
Hey, Derek Good morning. This is Neil as Rich said, we took a look at the act and as we anticipate becoming a full cash taxpayer in 2023, our effective tax rate is going to be above that 15% threshold. So we would anticipate this proposal to have any impact on us we've got our cash tax.
Profile.
Terrific, that's what I was expecting on the tech side, but.
Maybe as my follow up and thinking about the second half 'twenty, two and 2022 capital projections.
You help frame the degree of self help you're attaining and your Samuel Frac operations and long lateral development.
Yeah, well I think the sign more Fracs you know, we've talked about saves about $200000 per well so.
Cost benefit is there, but we're also.
What's driving that as we're completing you know roughly 50% more feet per day. So it's just been a big benefit and as I mentioned earlier, our water infrastructure really supports that operations and allow us, allowing us to get to that third Frac fleet. Early next year and then a longer laterals is really one we've seen Europe , great productivity out of the wells, but.
It just saves us 15% on a drilling and completion cost per foot and so it's just a more capital efficient way to do it in a contiguous acreage position in the block blocking spacers allowed us to.
Got about 1000 of those locations that we've identified today.
Hello, with trades and small acquisitions that we continue to work out, we're adding to that inventory and our acreage position.
Sets up well for just given how contiguous it is.
Terrific great update thanks for your time.
Thanks, Thank you Ms switches.
The next question is coming from Arun Jairam, calling from JP Morgan Chase. Please go ahead Sir.
Yeah, Good morning, Scott.
On Slide 13, you highlight some of the efficiency gains you're getting on the Frac side.
I wanted to get your thoughts on just.
Pioneers kind of future procurement strategy on Frac and we all know that your relationship with pump it kind of ends around year around.
Around yearend.
And I just wanted to get your thoughts on what you plan to do.
With your future Frac needs is.
Is electrification in the future or a shift towards more tier four DGB equipments. So wanted to get your thoughts on that.
Yeah, Ron I'll take that and really as I mentioned earlier, we are in the midst of contract in 2023 as you mentioned, we have a great relationship with pump they do a terrific job and they'll definitely you know part of our 2023 program will it be a 100% of it you know probably not in the green, but theyre going to still be part of it and in turn.
Moving to electric fleets in D. C. We're in the process of moving that way. We are definitely looking at contracted some electric fleets I think it'll be a transition to get to highlight power, we'd love to get there sooner, but the infrastructure in the Permian Basin, just can take some time to build that out and so it's probably going to be a progression, where we'll move off diesel.
I'll move to PNG LNG.
Our valued right now first and then get to highlight power later next year 2024 time frame.
But it's definitely the path were going on in India.
Amidst a bad will also have some DGB equipment. So we're gonna have we're moving that way and ultimately will be a more of a 100% of electricity, but that's still a couple of years out so hopefully that helps.
That's super helpful and just my follow up would be we've been getting just a couple of questions around.
Well productivity.
You have the you know.
Completely integrated the partially in.
And the double point assets, but rich I was wondering if you could give us a sense of how you would gauge ear to date well productivity for pioneer relative.
To historical trends and I'll leave it there.
Yeah, you know we're.
Continuing to complete our wells across the field until each bench has a little bit different profile, but overall the returns as you've seen from our free cash flow per Boe that we generate or are significant and so I'd say they are consistent with the last year or so of production profiles are they're probably not quite as high as they were in 2019 were.
The Wolfcamp, a and Wolfcamp b, because we're doing the full stack because it just.
Like some parent child issues longer term in a better way to develop the field and maximize NAV.
But overall, we've had consistent results.
Relative to the last couple of years.
Great. Thanks, a lot rich.
Thank you Sir.
Ladies and gentlemen, today's question and answer session I'd like to turn the call back over to Mr. Sheffield for any additional or closing remarks. Thank you.
Again, thank you for participating in the call today and look forward to seeing everybody at either on the road or next quarter's call again, Thank you very much.
Thanks, so much sir.
Ladies and gentlemen. This concludes today's call will take much for your participation. You may now disconnect have a good day and goodbye.