By Rebecca Elliott and Bradley Olson
Early this year, Scott Sheffield realized he had a problem.
Investors were cooling on Pioneer Natural Resources Co., the
company he built into one of the leaders of the American fracking
boom.
Like many shale companies, Pioneer was pumping a lot but making
little. It was spending hundreds of millions more than budgeted as
it strained to meet a goal Mr. Sheffield set years back --
producing a million barrels of oil and gas a day within a decade,
enough to rival OPEC nations such as Libya.
So in February, the company's board replaced Chief Executive
Timothy Dove, who had presided over the cost overruns, with Mr.
Sheffield, who had retired as CEO in 2016, and asked him to
engineering a turnaround.
Mr. Sheffield has since embarked on an extreme belt-tightening
regimen at the Irving, Texas-based producer. Pioneer is cutting
more than one-quarter of its workforce, including a cadre of senior
executives, in part through layoffs and buyouts. Among those who
are leaving is Mr. Sheffield's own brother, Thomas Sheffield, the
company's vice president of health, safety and environment.
The million-barrel-a-day goal? It's on ice as Mr. Sheffield
tries to convince skeptics that Pioneer is a shale company that can
live within its means.
"We lost the growth investors," he said in a recent interview.
"Now we've got to attract a whole other set of investors."
Shale drillers transformed the U.S. into the world's largest oil
producer, churning out roughly 12 million barrels a day, according
to the Energy Information Administration. But after years of losing
money, they are coming under intense pressure from investors and
Wall Street financiers to boost returns. How they respond will
shape America's heady pursuit of "energy independence" and its
burgeoning status as a geopolitical oil player.
Companies long valued on growth prospects are seeing new capital
dry up as many find it more expensive than anticipated to meet
lofty production goals. Under pressure to generate positive cash
flows, executives are slashing overhead and dialing back drilling
plans.
As the frenzy slows, the pace of U.S. production growth is set
to moderate this year. Many older wells are falling short of
expectations, and some operators acknowledge that they have fewer
future drilling locations than they once predicted.
Over the past 10 years, 40 of the largest independent oil and
gas producers collectively spent roughly $200 billion more than
they took in from operations, according to a Wall Street Journal
analysis of data from financial-information firm FactSet. During
that time, a broad index of U.S. oil-and-gas companies fell roughly
10%, while the S&P 500 index nearly tripled.
"It's time to be smarter about being responsible stewards of
capital," said John Groton, director of equity research for
Thrivent Asset Management, a Pioneer investor with about $19
billion under management.
At Pioneer, some employees were concerned about the feasibility
of meeting the million-barrel-a-day target set by senior
executives, former employees said in interviews with the Journal.
Some also raised questions about whether Pioneer's production
forecasts were too optimistic and would lead investors to overvalue
the company, former employees said.
Pioneer said in a written statement the target was achievable
and designed to challenge employees, noting that Exxon Mobil Corp.
and Chevron Corp. recently announced similar goals. Pioneer added
that it encourages employees to debate the assumptions used to make
decisions.
"To date, our well results have, on average, been consistent
with our expectations," Pioneer said.
Mr. Sheffield said the company had become overly focused on
growth. "I just don't think the discipline was there on the capital
side," he said. Mr. Dove, the former CEO, didn't respond to
requests for comment.
Shale wells produce a lot of oil and gas early on, but taper off
quickly, meaning drillers must continuously plow money back into
the ground to maintain output. The Journal previously reported that
thousands of wells drilled in the last five years are producing
less oil and gas than companies forecast to investors. Pioneer is
among the companies whose wells in some areas are on track to fall
short of expectations, according to the Journal's analysis. The
company disputes the findings, saying its methodology for
estimating well productivity differs from the Journal's.
Pioneer was formed in 1997 after Mr. Sheffield merged his
family's company, Parker & Parsley Petroleum Co., with
wildcatter T. Boone Pickens's Mesa Inc. At the time, the Permian
Basin of Texas and New Mexico, once a powerhouse oil field that
helped the Allied campaign in World War II, had turned into a
sleepy province of smaller, low-margin companies.
In one deal after another, Mr. Sheffield, a Dallas native and
petroleum engineer trained at the University of Texas, steered
Pioneer toward international prospects. He always kept his eye on
the Permian Basin, associates say, refusing to sell its holdings
there because he valued the predictable returns.
About a decade ago, Pioneer and other smaller operators in West
Texas came to understand that new hydraulic fracturing and
horizontal drilling technologies could be applied to the Permian's
oil-soaked layers of rock. The innovations led to a renaissance for
the Permian, which has since become the chief engine of the
American shale boom.
As "Permania" took off, Mr. Sheffield emerged as its central
pitchman. He made frequent television and conference appearances to
talk up the basin's abundance of oil. He developed a knack for
using figures that forecast the scale of the coming boom,
frequently comparing the Permian to prolific areas of Saudi
Arabia.
Mr. Sheffield began laying out an ambitious vision for Pioneer's
future. In 2014, he said the company had an inventory of wells to
last as many as 150 years. That year he told Forbes he believed
Pioneer could increase its output to one million barrels a day by
2024, from about 200,000 barrels.
Infusions of money from Wall Street, eager for a piece of the
fracking action, fueled growth at Pioneer and other shale
companies. Frackers tapped investors for more than $176 billion in
financing from 2015 to 2018, using debt and sales of new shares to
continue increasing production. Pioneer financed its expansion
during that time with $3.57 billion in bond and equity deals,
according to Dealogic.
"It wasn't how much money you were making. It was, 'How many
locations do you have?' " said Jon Brumley, a former chairman of
Pioneer's board.
Mr. Sheffield spoke optimistically about returns on the
company's wells, but that didn't always translate to overall
profits.
In August 2015, Mr. Sheffield said Pioneer's wells were expected
to yield 45% to 60% returns on investment at the oil prices at that
time, excluding costs such as administrative expenses and taxes.
The company lost $218 million in the second quarter of that
year.
The company acknowledged that capital spending exceeded
operating cash flow in 2015, but said it is focused on changing
that in 2019 and beyond.
In late 2016, Mr. Sheffield pushed back the timeline of the
million-barrel goal by two years, to 2026. He stepped down as CEO
at the end of that year and retired to the Santa Fe, N.M., area,
where he had bought a 2,300-acre ranch from actress Jane Fonda.
That left his handpicked successor, Mr. Dove, to complete
Pioneer's transformation. Mr. Dove, a graduate of the Massachusetts
Institute of Technology, sought to make the million-barrel goal
part of the company's strategic plan.
In early 2017, he gathered employees at a Dallas opera house to
formally unveil the goal, a move that took some employees by
surprise. He later told investors that Pioneer would reach that
target by increasing output by at least 15% annually. He also said
the company would bring spending in line with cash flow by 2018,
assuming a $55 oil price.
Some employees were less confident. Several times in recent
years, technical staffers raised concerns to management that
Pioneer was being too aggressive with how it talked up its
prospects to investors and potential business partners, according
to people familiar with the matter.
In one of those instances, the company eventually walked back
internal production forecasts for some of its wells in the Permian,
according to one of the people. In other instances, Pioneer
continued to use what some of the people said were overly
optimistic estimates.
Pioneer now says its oil output has been consistent with
expectations, and that it has produced more natural gas and
natural-gas liquids than expected. It says well productivity has
become more predictable as it has drilled more wells and gathered
additional data.
Pioneer ran into operational difficulties trying to produce as
much oil as it had forecast. In a rocky conference call in August
2017, Mr. Dove disclosed it had drilled a series of "train-wreck
wells" and said it would be lowering its oil production target for
the year. The company's stock fell 11% on the news.
Under pressure to meet quarterly output targets, Pioneer began
what employees called "the production push," according to one
former employee. It drilled two West Texas wells to horizontal
distances of 6,200 and 6,400 feet, according to data from energy
consulting firm Wood Mackenzie -- barely half the 12,100 feet the
company had permits to drill.
That allowed the wells to be finished faster and contribute
sooner to quarterly results, the person said, but at the cost of
reducing their total long-term production. After 16 months, the
wells generated about 125,000 and 160,000 barrels of oil,
respectively, according to ShaleProfile, an industry analytics
platform. Pioneer's average Permian well from 2017 generated about
212,000 barrels of oil in that time, ShaleProfile data show.
Pioneer said it didn't drill shorter wells to accelerate
production. "It is not unusual to drill shorter lateral wells for a
variety of reasons, including to reduce the risk of operational
challenges associated with longer lateral lengths," the company
said.
Last year, Pioneer's board grew more concerned about exceeding
the budget, chairman J. Kenneth Thompson said in an interview.
Shareholders were ratcheting up pressure to moderate growth and
spending. Pioneer spent $549 million more than it took in from
operations in 2018, according to FactSet, even though U.S.
benchmark crude prices rose to an average of $65 a barrel. Many
competitors also overshot their budgets, few by as much as
Pioneer.
Pioneer's board approved a $500 million increase in the
company's capital budget, to between $3.3 billion and $3.4 billion,
in the middle of last year, but was surprised to learn in January
about additional overspending of about $350 million, Mr. Sheffield
said.
By late February, Pioneer's shares had declined about 40% from
their 2014 peak. The board, with Mr. Sheffield as chairman, reached
a "strong consensus" that major cost reductions were necessary, and
Mr. Dove elected to retire, the company said.
Mr. Thompson, the current chairman, said the board wanted to cut
overhead to $2.25 per barrel of oil and gas produced, from $3.26,
and that Mr. Dove had opposed such moves, which would require
layoffs.
In his first year back as CEO, Mr. Sheffield wants to generate
roughly $800 million in excess cash, which would demonstrate that
Pioneer can meet investor demands for profits, cash flow and
growth. In addition to the job cuts, it sold acreage in South Texas
and is looking to shed assets used to process natural gas.
Pioneer's shares temporarily surged after Chevron sought to buy
Anadarko Petroleum Corp. Mr. Sheffield made clear he isn't
interested in selling Pioneer. He also isn't quite letting go of
his million-barrel goal.
"I can't guarantee we're going to grow 15% a year if I don't
know what the oil price is," he said, explaining it could take as
long as 15 years if the industry experiences more downturns. "But
my point is the rock will produce over one million barrels a day,"
he said.
Based on its existing well production and drilling practices,
Pioneer would need as many as 90 rigs -- about four times its
current total -- to reach one million barrels a day by 2026,
estimates Tom Loughrey, president of oil-and-gas consulting firm
Friezo Loughrey Oil Well Partners LLC. "This is really outside the
realm of possibility," he said.
Pioneer has told investors it would take 60 to 70 rigs to
produce one million barrels a day by 2026. It said it hoped
drilling advances would allow it to reach the target with fewer
rigs.
Write to Rebecca Elliott at rebecca.elliott@wsj.com and Bradley
Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
June 24, 2019 11:19 ET (15:19 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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