Pioneer holds on hedging, expects price rally: CEO

OREANDA-NEWS. July 20, 2016. US independent producer Pioneer Natural Resources will keep its 2017 hedges at 50pc of output in anticipation of a price rally over the next year, chief executive Scott Sheffield said.

Pioneer recently kept its cover below its self-imposed target of 75-80pc over a three year period. It sees prices rising eventually as conventional output declines in the US and globally, Sheffield said today.

"The spike will come in 2018-19 so we do not want to hedge too early," he said at a discussion today at Washington think tank Center for Strategic and International Studies.

Pioneer's existing hedges are structured to keep its realized prices between \\$50-\\$62/bl, Sheffield said. The company receives \\$50/bl if prices are between \\$40-\\$50/bl and has to give up the upside if prices rise above \\$62/bl, he explained. The hedging structure yielded a \\$229mn loss for Pioneer in the second quarter, swinging from a \\$43mn gain in January-March.

The Nymex light, sweet crude front-month contract settled at \\$45.24/bl yesterday and the forward curve stays below \\$58/bl through the end of 2024.

But Sheffield expects prices to recover to \\$60/bl over the next year, with even higher prices on the horizon.

"I am a firm believer that lack of investment is eventually going to lead to more declining conventional production and the inventories will start responding," he said. "So there will be better times to hedge."

Pioneer, with its operations focused on Texas' Permian basin, is among the few US shale producers to announce an increase in drilling activity. But Pioneer, unlike many of its peers, is well situated, has low operating costs and can make a profit if prices are above \\$19/bl, Sheffield said. The company's first quarter output was 220,000 b/d of oil equivalent and it expects a 12pc production growth this year.

At current price levels, US output will continue to decline and a resumption in growth would require price levels above \\$60/bl, Sheffield said. But even at \\$60/bl, US shale production cannot grow quickly enough to keep up with demand and declining conventional output globally, he said.

US crude output should decline to 8.61mn b/d in 2016 and 8.2mn b/d in 2017, the Energy Information Administration (EIA) projects. The agency does not expect the US output to reach its 2015 high of 9.43mn b/d until 2025.

"We are the swing producer but it will take two-three years to bring that production on line," he said. The Permian basin can eventually grow production by 5mn b/d and Niobrara could add 0.5-1mn b/d, "but I do not think the Permian alone is going to save the rest of the world."

Crude output in the Permian basin should be 1.98mn b/d in July, the EIA said in its latest Drilling Productivity Report. It estimated production across the seven US shale basins at 4.65mn b/d this month, a decline of about 800,000 b/d on the year.

With international oil companies cutting investment in new projects, the pace of production declines may accelerate in 2018-20, "setting us up for another shock," he said.