Pioneer Natural Resources Company - Q1 2021
May 5, 2021
Transcript
Speaker 0
Welcome to Pioneer Natural Resources First Quarter Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer Rich Daley, President and Chief Operating Officer Joey Hall, Executive Vice President of Operations Anil Shah, Senior Vice President and Chief Financial Officer. Pioneer has prepared PowerPoint slides to supplement our comments today. These slides can be accessed over the Internet at www.pxd.com. Again, the Internet site to access the slides related to today's call is www.pxd.com.
At the website, select Investors, then select Earnings and Webcasts. This call is being recorded. A replay of the call will be archived on the Internet site through June 1, 2021. 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. 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 the Securities and Exchange Commission. At 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, Nick. Good morning, everyone, and thank you for joining us. Today, we will be discussing our strong first quarter results And the highly accretive acquisition of Double Point Energy that leads to a stronger outlook with significant free cash flow generation. We will also detail the high level of execution our teams continue to deliver and the top tier ESG standards to which we adhere. After that, we will open up the call for your questions.
With that, I'll turn it over to Scott.
Speaker 2
Thank you, Neil. Good morning. Slide number 3. Pioneer delivered a very strong Q1 generating free cash flow approximately $370,000,000 when adjusted for partially acquisition cost. You can see that we increased our 2021 estimated free cash flow up to about 2 point $7,000,000,000 That's at strip pricing, which includes a contribution from the very accretive acquisition of Double Point And obviously higher commodity prices as the strip continues to move up.
You can see the magnitude of the synergies 525,000,000 Which will improve our free cash flow generation, which will be highlighted on a subsequent slide. And again, we'll remain focused on environmental stewardship and minimize flaring through our operations. Lastly, you can see now with Double Point, we're the largest producer in Permian that brings lower cost to capital, economies of scale, shared facilities and infrastructure. And going into 2022, the company will be over 700,000 barrels of oil equivalent per day just in the Permian Basin in 2022. Going to Slide number 4.
I think the key point here, solid execution from all levels of operation in our field drives strong first quarter results. Again, the outperformance exceeded the top end of guidance. Oil production was due to our field staff bringing our production back online sooner in the wake of the winter storm and also the outperformance of new wells. Going to Slide number 5. As Neil mentioned, we closed yesterday on our Double Point Acquisition, approximately 100,000 Acres, right in the heart, the core of the core of the Midland Basin.
This will take our Midland Basin on up to over 900,000 net acres. This transaction generates double digit free cash flow on accretion per share, Enabling increased variable dividends over the next several years. Now with the contiguous acreage and the operational synergies. Just to give you an idea how dominant we are in the Midland Basin, we'll have 25% of the basin rig count And 25% of the basin frac fleet rig count. Again, allows for continued synergies, drilling longer laterals, which Rich will talk about later.
Our production exceeded as discussed in the press release, production for Double Point exceeded 92,000 barrels of oil equivalent per day this week, which is way ahead of schedule, as we're moving forward to averaging over about 100,000 barrels of oil equivalent per day in the last 6 months of 2021. Going to Slide number 6, long term investment thesis. When you look at the strip last year, I mean, over the strip over the next several years as it continues to move up and look at our model of growing oil production 5% per year over the next several years. Our reinvestment rate will actually be below, we say 50% to 60% here, it will actually be below 50%. Generate strong corporate returns, double digit returns.
We'll continue to reduce our leverage. It's at 1 today. We'll continue to reduce it below 0.75 next year and continue to drive it down to a very, very low level. We remain committed to our really our key thesis and returning most of our capital back to the shareholders. So we're targeting a 10% total return.
We'll talk more about that later. Going to Slide number 7, compelling free cash flow generation. We're showing now with Double Point Energy on top in the brighter darker blue color, adding about $5,000,000,000 of free cash flow over the next several years through 2026, on increasing our total free cash flow at the company with the strip and this is a strip a few days ago, so the number continues to move up with the strip moving up, generating $23,000,000,000 of free cash flow. As we have already stated approximately this actually represents 50% of our current enterprise value, that 20 total enterprise value, including market cap plus debt. The addition of Double Point is a 25% increase on top of our free cash flow.
Just taking the $5,000,000,000 over the $23,000,000,000 $5,000,000,000 over $23,000,000,000 I I think what's key is that when you look at the current stock price, our dividend yield will move up from 1.5% to over 4% in 2022 and over 8% in the following years, 2026. That's at the current stock price. I do have to have a call out for Devin and Rick's great slide comparing their dividend to peers. I think we're in there around 1.5% toward the bottom quartile. They're showing them leading this year at 7%.
Pioneer will move to 2nd place next year, moving over 4 And then moving up to the top spot above Devon. And the primary driver is really just our margins in the high 20s, our low cost basis, and in addition to the fact that we're paying out 75% of our cash flow versus Devin's 50%. Going to slide number 8, again just emphasizing the variable dividend, long term shareholder return model. Last quarter, we initiated the mechanics of it mechanics will be paying out long term roughly 75% of the remaining annual free cash flow After the base dividend is paid, when you look at including the base dividend, approximately 80% of the company's free cash flow is expected to be returned to shareholders. Between the base and the variable dividend shareholders, next year we should expect 8 separate dividend checks per year.
Obviously, this is all subject to our Board approval like we do on the base dividend and the variable dividend. Let me now turn it over to Rich.
Speaker 3
Thanks, Scott, and good morning. I'm going to start on Slide 9. And with the closing of the Double Point transaction yesterday, we wanted to provide an update updated outlook for our 2021 production and capital. As Scott mentioned, Double Point is currently producing at 92,000 BOEs per day and we expect to ramp them up to about 100,000 BOEs per day by the end of the quarter and with an additional 20 to 25 POPs planned between now and quarter end. We plan to maintain that production at 100,000 BOEs a day for the second half of the year, And so that's embedded in our updated guidance.
And we also have adjusted our guidance to reflect the actual results for Q1, where we were able to recover production from the winter storm quicker than anticipated and along with the Q1 strength of our well performance and the execution by our operating teams. So overall, we are forecasting 2021 production of 351,000 barrels of oil per day to 366,000 barrels of oil per day and on a BOE basis, dollars 605,000 to $631,000 Looking at capital, we are adding $530,000,000 to $570,000,000 of incremental capital related to the Double Point transaction over the course of the remainder of the year. This is up from the bottom of our previous announcement since we were able to close the transaction earlier than originally anticipated. Total CapEx is now projected at $2,950,000,000 to $3,250,000,000 on cash flow of about $5,900,000,000 based on strip prices, Which is leading to what Scott talked about, dollars 2,700,000,000 of free cash flow for the year. Turning to Slide 10.
You can see our full year that we plan to average 22 to 24 rigs And deliver 470 to 510 POPs. If you take that just for the remainder of the year, we plan to run with the addition of Double 24 to 26 rigs and 7 to 9 frac fleets. Currently, we're at 26 rigs and 9 frac fleets. This does reflect the fact that we do plan on reducing Double Point's rig count from 7 to 5 by year end. And longer term as we think about reducing our growth rate from 30% down to 5%, I think we can drive that down to 3 to 4 rigs as we consistent with our 5% growth plan over the long term.
You can see on the map there over 1,000,000 acres predominantly in the Midland Basin, 920,000 and 100,000 acres in the Delaware. In terms of Delaware plans, we will start drilling our first wells there later this year. The team is looking forward to bringing that same efficiency gains that we have achieved in the Midland Basin to the Delaware and see how we can further improve our wealth returns, especially given the higher oil cut That we see in Delaware and the lower royalty burden. So and just for a point of reference, 1st quarter production was 70 4% oil in the Delaware. Turning to Slide 11, I want to provide an update on our planned synergies related to Parsley and Double Point transactions.
On G and A, we've accomplished $100,000,000 of Parsley savings. So that's we checked that box. As it relates to Double Point, they're running about $25,000,000 annually in G and A. We expect to bring that under 10,000,000 on an annual basis and we think we'll be there beginning the Q3 of 2021. On interest, we refinance Parsley bonds in January.
If you recall, those were over 5% coupon where we financed those on a weighted average basis well under 2%. And we plan on refinancing the Double Point bonds later this month. So along with paying off Double Point's credit facility that happened yesterday, We're going to accomplish our interest savings sooner than we originally anticipated, and we'll have that fully done by the end of this month. On operational synergies. We are making great progress on those.
We've been able to leverage our supplier relationships and are seeing significant savings Things like pressure pumping, wireline, cement, casing and tubulars to name a few examples. We've also And Joey will talk more about this successfully tested time off frac on our acreage during the Q1 and we're seeing significant savings Like the industry, other industry participants in that $200,000 to $300,000 per well. So this is something that we'll be able to not only execute across Pioneer's acreage, but We'll also be able to execute that, I guess, across Parsley's and Doublepart's acreage. The team has also continued to optimize our development plans To take advantage of existing facilities, so looking at tank batteries, water disposal, saltwater disposal gathering system, reuse facilities really optimizing those as we move into the 2022 program, sorry, to really take advantage of those savings. And then as Scott mentioned, one of the other significant benefits of combining Parsley and Double Point is really adding to our contiguous acreage position.
And what this allows us to do is we've successfully drilled longer laterals out to 15,000 feet, really up from the 9000 to 10000 feet that we've been drilling at, will allow for a lot of locations that we can drill longer ladders on, which is much more capital efficient and really adding essentially the same production by drilling fewer wells. So it's still early, but it should add significant long term value across our portfolio and just demonstrates the benefit of having contiguous blocky acreage to be able to drill that type of laterals. Turning to Slide 12. Well, this just reflects our trend of what we've accomplished on G and A over the past 3 years, including the synergies from the acquisitions. We are forecasting G and A per BOE to be around $1.15 to $1.20 by year end.
And so I think this is just an example of really and highlights the focus of the company's head on improving returns And improving our return of capital to shareholders. So it's really lowering our overall cost structure. So you've seen us drive down well costs, lower LOE, lower G and A per BOE, lower interest per BOE, all with the idea of improving our free cash flow profile. With that, I'll turn to Neil to
Speaker 1
talk about breakevens. Thanks, Rich. On Slide 13, you can see how Pioneer's high quality asset base positions us as the only E and P to realize a corporate breakeven below $30 a barrel WTI within our peer group. As Scott stated earlier, it is this attractive peer leading breakeven oil price that enables Pioneer's low investment rate Andrey's significant free cash flow generation and return of capital to our shareholders. This low breakeven price reflects to the quality and the resilience of Pioneer's portfolio, underpinning our operational and financial strength and flexibility.
Speaker 3
With that, I'll turn it over to Joey. Thanks, Neil, and
Speaker 4
good morning, everybody. I'm going to be starting on Slide 14. Our drilling and completions teams continued their streak of resetting the bar with another great quarter of efficiency gains. Our Simulfrac operations contributed to these gains with the successful execution of 4 pads in Q1, where we were able to achieve approximately 3,000 feet of completed lateral per day. This is greater than a 50% improvement when compared to our program average.
It's still early days, but we estimate savings to be in the range of $200,000 to $300,000 per well. We will continue to Fine our Somofrac operations and conduct more trials throughout the Q2. You will note that our wells per pad projection for 2021 is down slightly from last quarter and this is due to the integration of Double Point Pads into our schedule. Still our wells per pad continues to increase, which further contributes to our efficiency gains. I know this slide Not only illustrates improvements in drilling and completions, so I want to emphasize that we are also seeing tremendous performance in our production operations, facilities construction and water management teams.
None of this would be possible without those that support development planning, our robust supply chain and our expanding use of technology. I also want to thank all the teams for their efficient integration of Parsley and a great start on Double Point. We remain focused on delivering peer leading performance, keeping our people safe and reducing our environmental footprint. And so congratulations to all the teams for their contributions to our safe Efficient execution in Q1. I'm now going to go to Slide 15.
I know that Scott covered this in some detail last quarter, so I'll be brief. This chart represents more than 64,000,000 barrels of hydrocarbon liquids per day, including the largest national companies, majors and independents. Pioneer's operations produced barrels with 1 of the lowest associated CO2 emissions intensities globally. Our low cost, low emissions barrels Will continue to be desired around the world. And with that, I'm going to turn it back over to Scott.
Speaker 2
Thank you, Joey. On Slide number 16, a strong focus on ESG. Pioneer continues to hold all pillars of ESG of great importance. We've talked about our new sustainability report released late last year, Which reflects our significant strides in reducing both Scope 1 and Scope 2 greenhouse gas and methane emissions And incorporates emissions intensity reduction goals on both. Pioneer inclusive of Parsley has a very low flaring intensity of 0.4% comparative peers of 1.3%.
We will also work to bring Double Point's assets in line with Pioneer's high standards of environmental stewardship. We also continue to promote a diverse workforce all the way up to the Board level, which reflects the community in which we live and work. Again on Slide 17, we're really committed to driving value for our shareholders and returning cash flow back to the shareholders over the next several years. We'll stop there and open it
Speaker 0
up for Q and A. Thank you. And our first question comes from Neil Mehta with Goldman Sachs. Please go ahead. Good morning, team.
I guess the first question is in a short period of time, you've done 2 acquisitions here, both in Parsley and Double Point. And just want to get Your perspective, Scott, on whether you view Pioneer as a roll up company story and a natural consolidator in the Permian Basin Or were these just 2 opportunistic transactions that made sense in the moment?
Speaker 2
No, we're We are focused primarily on the Midland Basin. 2 opportunities came to us. They came to us earlier than we had thought. There are great opportunities. They're both highly accretive and we're focused on bringing those 2.
We pretty much have already accomplished the a lot of the synergies on Parsley Lee, because we had started so much earlier before we closed in last October. They will point, I'm confident our team We'll be able to bring that on, but those are primarily the 2 key components of Midland Basin and makes us stronger as we talked about in the Midland Basin. The other opportunity I've mentioned in the past to our shareholder base and to other analysts Is not available, the other large opportunity in the Midland Basin.
Speaker 0
So fair to assume that you're going to take some time to digest these transactions before moving ahead with another one. Exactly. Okay. And the follow-up is on Slide 7. This is a really good one.
And I just want to kind of walk through the math with you guys. Let me know if any of this sounds off, but you got $23,000,000,000 of cumulative free cash $3,000,000,000 in 2021. So the period from 2022 to 2026, that 5 year period, you got $20,000,000,000 of free cash flow. Over 5 years, that's like $4,000,000,000 of free cash flow per year on a $40,000,000,000 market cap or So it's 10% free cash flow yield. And I think in the next slide, you said you plan on paying out 80% of that in the form of a dividend either fixed or variable.
So is it fair to assume based on this framework, we should be thinking about kind of 8% through the cycle dividend yield on the current market cap? Anything that I'm missing there and anything you'd like to add. Neil, you got
Speaker 2
the numbers perfectly and that's why We stated what we had stated and it's all you got to realize the strip is in a $10 backwardation. So if you take the current stripped today and go out through 2026. It's 10 years. So you can imagine what the free cash flow is, If you just march the current price forward through 26, the number simply increases. So it is an extreme backwardation even with the $23,000,000,000 but your calculation of 8% plus is very good.
Speaker 0
Okay. Thank you, Scott. Thank you. And our next question comes from John Freeman with Raymond James. Please go ahead.
Anything else, Neil?
Speaker 5
Good morning, guys. Can you guys hear me?
Speaker 1
Operator?
Speaker 0
Yes. Please go ahead, Mr. Freeman.
Speaker 5
Yes. Can you hear me?
Speaker 2
Yes, we can hear you.
Speaker 5
Okay, great. Sorry about that. So Rich, I just want to make sure that I
Speaker 1
Operator, I'll lose you or I'll listen there.
Speaker 5
Can they not hear me? Just you, operator.
Speaker 0
All right, speakers, you are back on the line. Questioner, please go ahead.
Speaker 1
Okay. Hey, John. It's Neil Shah. Apologies to everyone on the line. For some reason, we dropped.
Not sure why, but we dialed in. We'll be sure to extend it to ensure we get all the questions in as required. But apologies on our end, we're back on. Happy to answer and take all your questions.
Speaker 5
Great. This is John. I hope it wasn't anything I said that caught me issues.
Speaker 2
Yes. Sorry, John, we never heard your first question.
Speaker 5
Hey, no worries. So I was just following up, Rich, on I just want to make sure that I heard right on the Double Point, legacy Double Point, so that's you dropped down to the 5 rigs to kind of hold that 100,000 barrels a day flat in the second half of 'twenty two. Did you say that it drops to basically 3 to 4 rigs, if you wanted it to kind of have the 5% sort of growth rate similar to legacy Pioneer.
Speaker 3
Yes, I would say the first is that we dropped We keep it 100,000 flat for the second half of twenty twenty one, not 'twenty two, just I'm
Speaker 5
sorry, that's not it.
Speaker 3
I'm sorry, that's not it. 'twenty
Speaker 5
one. Yes.
Speaker 3
And so as we move into 'twenty two, we'll be in that 5 rig, but we're just saying longer term is their decline rate that's in the 40% higher 40% range moderates back to our 30 mid-30s to low 30% rate that it will move down to 3 to 4 rigs to keep production at that 5% growth consistent with our growth plan. So it's really that's what we think it'll take long term to grow their assets at 5% consistent with growing our assets at 5%.
Speaker 5
Got it. Thanks. And then on Slide 11, we all sort of show the progress that you all made on the synergies And then Scott, you said, I believe that you'd already sort of realized most of the synergies associated with the Parsley transaction. So does that mean that the $100,000,000 that was sort of in the budget So the Parley integration expenses that will largely show up in the financials by 2Q. Is that the way to think about that?
Speaker 3
No, John, I would think about it. It really is the G and A and the interest. We've accomplished those, the operational ones we're progressing, but it's still going to be year end before we You'll get some of that capital to tie in deep disposal wells, to tie in different tank batteries, Tatayan Water Systems. So they're just and bring their standards up to ours in terms of environmental. So there's still that capital is still going to be progressing throughout the year.
So we've made good progress on G and A and interest, those are done for Parsley. Operationally, we're well on our way on the supply chain side of things and other things that we've been able to accomplish, but It won't be complete until we get to closer to year end.
Speaker 5
Great. I appreciate it guys. Well done.
Speaker 1
Thank you.
Speaker 0
Thank you. Our next question comes from Jeanine Wai with Barclays. Please go ahead.
Speaker 6
Hi, good morning everyone. Thanks for taking our questions. Our first question is on maybe inventory. Now that Parsley and Double Point, they're both in the portfolio. Can you update us on the number of Tier 1 inventory that you have at the current 5% growth rate?
And what do you think the right amount of inventory from a value perspective.
Speaker 3
Yes, Jeanine, what I'd tell you is with the adding these things, probably our Tier 1 inventory is close to 15,000 locations at this point with the combination of the 3 transactions. And so these are all premium locations that will get developed even in low commodity prices. So that's really what we're focused on executing and that's a long inventory out there to get developed.
Speaker 6
Okay, great. Sounds good. And then maybe if I could sneak 1 in on 2022 since you have a little bit of longer term commentary out there. Can you please talk about how you see activity levels in the back half of 'twenty one once you've got Double Point fully up and running? And I guess I'm just thinking back to last quarter and pre Double Point when Pioneer was forecasting a strong 8% to 10% exit rate this Cheah 4Q to 4Q and that's set up for a favorable 2022.
But now you've got double point, it looks like the exit rate will be moderating a bit, Could be strong, still see very strong capital efficiency in 2022, but maybe just looking for a little bit of commentary on how you see the back half of the year and the exit? Thank you.
Speaker 3
Yes, Jeanine, great question. Yes, as I mentioned in my prepared remarks, we'll be running that 24 to 26 rigs and 7 to 9 frac fleets. But when we think about 2022, think about it as basically on an oil basis being 5% growth on a normalized 2021. And When I say normalized 2021, I mean assuming 100,000 BOEs a day for Double Point as for that number and then assuming that we had the 11 days from Parsley in adjusting for the weather. And so when you adjust for those things and look at it in 2022, is it basically going to be in that 5% oil growth.
And as Scott talked about, that will be slightly on a BOE basis, slightly over 700,000 BOEs a day.
Speaker 6
Okay, great. Thank you.
Speaker 7
Sure.
Speaker 0
Thank you. Our next question comes from Derrick Whitfield with Stifel. Please go ahead.
Speaker 8
Thanks and good morning all. Perhaps for Rich or Joey, the revised 2021 Operational plan is now targeting longer lateral lengths. To what degree did Double Eagle directly or indirectly impact that estimate based on their plans or your revised legacy plans inclusive of their position.
Speaker 3
Yes, Derek, I'd say we're still In terms of longer laterals, the team is working on that, but most of our development plan for 2021 and double points and parses we talked about earlier Because of permitting everything, those are already well established. So there may be a few tweaks here and there, but I would think about longer laterals really coming into our portfolios more in the late this year, but more likely in 2022 as we can plan for them and get them on the schedule appropriately. And it will just be part of our capital allocation process. And now that we I have confidence in doing it and have experience. We'll start looking at just how that looks in our capital allocation and where those rise in terms of rate of return and focusing on those high rate of return projects first.
Speaker 8
And as my follow-up and perhaps just to dig a little further on lateral lengths. Wanted to get your view on optimal lateral lengths as we've noticed a few 15 1,000 foot laterals show up in state data. And specifically, could you comment on your appraisal activity to date, the technical challenges you're experiencing and where you think the efficient frontier is for Pioneer. Certainly with your highly contiguous and blocky position and inventory depth, We believe you guys stand to gain the most from long lateral development.
Speaker 4
Yes, Derek. We've kind of taken the rather than jump into the water, taking the slow approach into moving into the longer laterals. I don't know the exact count, but we've drilled quite a few 15,000 foot laterals already. And Again, we'll continue to feather those into our program as the land opportunity presents itself. In the early days, we were trying to mitigate the risks primarily associated with completions, but we've done a tremendous job, particularly on the drill outside Being able to mitigate those risks and we've seen minimal to no challenges.
So, long story short there, we'll continue to put those into our portfolio as The Opportunity Allows. And I assume that on the appraisal question, you're talking about appraising the 15,000 foot lateral, or are you talking about The entire portfolio.
Speaker 8
More around appraisal of the 15,000 foot lateral, but certainly there's going to be an applicability factor within your portfolio.
Speaker 4
Yes. Now you'll continue to see us drill more and more 15,000 foot laterals. 1 of the Bigger challenges, like I said, is on the drill outside. And so where we were hesitant was on the shower zones because you have lower pressures and it makes it more difficult. We've had great success and our Parsley predecessors had some great success in drilling some of those shallow zones And being able to get them completed and drilled out.
So I think that is just another opportunity that we've recognized and you'll continue to see us expand our use of 15,000 foot laterals going forward.
Speaker 3
Once again, Derek just highlights the benefit of having contiguous and blocky acreage and lease configurations that allow us to get to those links. It will just be much more capital efficient going forward.
Speaker 8
Very helpful. Well done, guys.
Speaker 9
Thank you.
Speaker 0
And our next question comes from Charles Meade with Johnson Rice. Please go ahead.
Speaker 10
Good morning, Scott, and to the rest of the guys on your team there. I wanted to ask a question, maybe this is for Joey, I'm not sure, but I wanted to ask a question to drill down a little bit more on the 1200 Double Point locations. Can you give us a sense of this is picking up a bit on the long lateral question. Can you give us a sense of what the average lateral length of those 1200 locations is and how they break down across, say Wolfcamp B, Wolfcamp A, Middle Lower Spraberry, that sort of a look.
Speaker 3
Yes, I don't have the exact numbers here in front of me, but in general, the 1200 are in you saw on the maps, the blocky acreage in Midland County and down in Upton County. And so generally they've been drilling 8000 to 9000 The laterals to deliver 9,000 to 10,000, so call it in that they're all going to be in that 8,000 to 10,000, but we haven't assessed their acreage yet for the longer laterals in terms of what that would look like. We surround all that acreage and so there's clearly going to be a big chunk of acreage that we can put 15,000 on, we just haven't done that work here. That's something we have to continue to do over the course of the next few months. And so, more to come later on.
I just don't I don't remember the Exact counts by zone, so apologies for that.
Speaker 10
Got it. Yes, that makes sense.
Speaker 3
It's in the quarter to quarter, so it's all the same 6 zones that we're drilling in terms of Joe Mill, Middle Spraberry, Lower Spraberry, A, B and D for sure.
Speaker 10
Got it. And yes, it does make sense that some maybe a 5000 or 10000 could turn into a 10000 or 15000 foot location. And Scott, I think this is a I'd like to ask a question of you on that Slide 7. And I really appreciate that you guys have given us a glimpse that we don't often get of, in this case, a 6 year plan. And it really to me, it really highlights the or kind of underscores the value in this group right now.
But I wanted to ask you is in your career at Pioneer or even some of the predecessors. Have you ever do you recall another time when 6 years of free cash flow at the Strip represented 50% or more than 50% of EV of a company you were working Form.
Speaker 2
No. In fact, Inverness put out a recent publication and they use Pioneer as example. We never do confirm the numbers, but what's interesting to me, they said we spent 133% of our cash flow over the last 10 years, And we grew over 25% per year the last 10 years. And I think this new model spending less than 50% of our cash flow and returning over 80% back to the shareholders is going to be a much better stock performance for us, for all shareholders, Pioneer. And so I just think it's a unique model, and I hope all public companies stay disciplined, because I'm very optimistic about the pricing environment over the next several years.
So this is not going to be so the price is going to keep going up. I've been stating we're going to bounce around between $50.70 but Obviously, we're going to be over 70 before we know it.
Speaker 3
And the
Speaker 2
only thing that's going to bring it down, it's not going to be supply this time Because U. S. Production is moderated, it's going to be how long will demand continue to pay a higher price. And you have to go back to 2013 2014 when oil was closer to $100 a barrel and somewhere between $80 $100 a barrel where demand is going to reduced it's going to take demand reducing the price. So I like the cycles obviously much better of too much supply coming on and tanking the market.
Let's let supply demand take care of it. So I'm very optimistic about pricing over the next several years.
Speaker 10
Got it. Thank you for sharing your perspective there.
Speaker 0
Thank you. And our next question comes from Paul Cheng with Scotiabank. Please go ahead.
Speaker 9
Thank you. Scott, talking about you are more optimistic about the pricing outlook And the company is also a very different company. From that standpoint, how should we look at hedging program for the company going forward? Should that be dramatically scaled back or even eliminate? That's the first question.
Second question is for maybe Rich. I think right now in the double point, you are running say 7 rig and you're scaling down to 5. So you're averaging about 6 rigs and you're saying that you're going to stay about flat at 100,000 barrels per day. But then that for next year, you think that at 5 rig or more, you probably would be able at around 5 rig, you will be able to grow at about 5%. So are you building a lot of tug for the remainder of this year?
Trying to reconcile why that the higher rig program for this for the second half of the year will only be able to keep it While by next year that our lower rig program will be able to grow it. Thank you.
Speaker 2
Our core hedging in the first half of twenty twenty one is on now. So that's why we have such stronger free cash flow model into the back half of twenty twenty one. We're calling CSU much less hedging. One reason we would do more hedging if
Speaker 3
it runs up into that And then Paul on the rig count, really on double point, you're moving from the 7 rigs down to 5 by the end of the year And then growing their production from that 100,000 to the 100 and 5,000,000,000, I mean, you're exactly right on those numbers. Really the planned in 2022 would be roughly around that 5 rig program. And as I talked about in John's question, that not longer term moving that to 3 to 4 rigs, but it's really just being driven because they have a steeper base decline rate, just given they've grown faster. And so This will moderate that growth as we cut their production growth from 30% back to 5%, but it just takes a little while to get on that. We saw that back when we Looked at Parsley when they came in at 2019, 2020, they were growing big rate in 2019, slowed their activity in 2020 and it moderated their production back into that low to mid-30s like ours.
So we anticipate the same thing happening with Double Point and that rig count will moved down to 5% and ultimately lower.
Speaker 9
And you think that it will be so quickly that you can bring down the underlying decicurus that next year at 5% reduction would be able to grow at 5% already.
Speaker 3
Yes, I think you'll see that by end of 2022 that base decline on Double Point is normalized Bactar. We saw like I said, we saw the same thing with Parsley. So I would anticipate it being in that range.
Speaker 9
All right. Thank you. Sure.
Speaker 0
Thank you. And our next question comes from Neal Dingmann with Truist Securities. Please go ahead.
Speaker 11
Good morning, all. Thanks for the time. My first question is on your well space and specifically guys, I was wondering, would you all are you going to continue to largely co develop? And then second, just what type of spacing are you still assuming on sort of primary and secondary zones?
Speaker 3
Yes, our spacing hasn't changed in that 800 to 900 foot ranges that we plan on doing that and we're still looking at that full co development and full as we call it full stack where the Geology supports it and we're going to do either the full stack development for all the zones. So that's really no change in that development program.
Speaker 11
Okay. And then just secondly follow-up on long term free cash flow guide. I'm just wondering specifically behind that, Scott, that you laid out. I'm just wondering, can you talk about is the price assumption just on strip behind that and I'm just wondering baked on that are you including sort of quarter in quarter out working capital and quarterly dividends. I'm just wondering sort of maybe some of the expectations, the assumptions behind that.
Speaker 2
Yes, it includes it is the strip. As I said, it's about a $10 backwardation. So it's strip as a few days ago. The strip Today is obviously higher. It does include increasing the base dividend roughly 2% to 3% per year on the base dividend, and includes our 50% payout next year and 75% after that.
Speaker 11
Margie, thanks for
Speaker 2
taking the oil. And growing oil 5% per year.
Speaker 11
And you do throw in the working capital there as well, The change in working capital in each quarter. Yes.
Speaker 10
Okay. Thank you.
Speaker 0
Thank you. And moving to our next question, this comes from Scott Gruber with Citigroup. Please go ahead.
Speaker 7
Yes, good morning. So as we look at the backdrop here, inflationary trends appear to be intensifying, We've seen steel prices move and chemical prices move. And now the service companies are starting to talk about testing pricing. Can you just speak to your ability to offset inflationary forces near term, obviously have efficiency gains in your legacy assets and further gains on the acquired assets, Simulfrac No lateral extension next year. Just some color on your ability to fully offset these inflationary forces here near term?
Speaker 3
Steel and diesel, sand, chemicals, cement, those are the things that we're seeing in raw product that we're seeing that inflation. We have not seen any pressure on scrub Scott the efficiencies we're drilling and completions, so the operations are doing it. So those things are really offsetting that 4% to 6% and expect that the case for the remainder of this year's contract obviously as well. So we don't see any pressure above that. It will be a little bit positive with efficiency.
So
Speaker 7
Got it. And just as we start to think about 2022, should the analyst community start thinking about some modest D and C inflation, or do you think you'll be able to continue to Offset, reasonable rate of inflation into 2022 as well.
Speaker 3
We'll have to continue to watch it to see, but our assumption going into it is that we'll continue to see efficiency gains and we'll be able to offset it with efficiency gains.
Speaker 7
Got it. Appreciate the color. Thank you.
Speaker 5
Sure.
Speaker 0
Thank you. And our next question comes from Doug Leggate with Bank of America. Please go ahead.
Speaker 12
Thanks. Good morning guys. Just a spin shake first of all. Can you all hear me okay?
Speaker 2
I think so, Doug. Yes, it's a little vibrating.
Speaker 12
Yes, you guys are a little choppy on your end, so I want to let you know. Okay. So I've got one philosophical question relating to Double Point and then one, Neil, probably for your valuation question. I for 1 appreciate guys the free cash flow visibility that I think the sell side is finally figuring out how to value your business, which is a great thing for the whole market. But my question on Double Point is you're now presiding over very significant growth in the basin.
In other words, adding to global supply, which kind of goes against your philosophy, Scott, about capital discipline. So why would you still look to grow when you're already acquiring a very aggressive growth story at Double Point in 2022? Can you kind of corporates a little bit what you're saying about industry capital discipline?
Speaker 2
Well, no, I think, I mean, our acquisition actually helps the situation obviously, but if we could take out other If other companies would take out other privates, they would help too. But our deal was driven primarily the fact that this is core to core acreage. And we've focused on making sure that we hit double digit accretion and that We can add value to all of our shareholders and we had a significant double digit accretion on variable dividend cash flow per share. That was the key driver. At the same time, we've got to meet our corporate returns and beat all corporate returns, Rosy Croce in net asset value.
So the transaction did that too. So I don't know if that's answering your question, but that was the key driver and I hope other privates are taken out that are growing too much. They still have a large part of the rig count. And I've answered the question that I just don't think privates are going to upset the OPEC situation at this point in time and a lot of the privates are in the Haynesville obviously and growing the Haynesville significantly. So does that answer your question, Doug, or were you kind
Speaker 12
of losing some thought? Yes. I guess just to be clear, the feedback we have This is the fact that Pioneer is prepared to do this great bolt on, no question about it in terms of the acreage. Is it going to encourage Privilege to go crazy, curling, so they can sell themselves. And that's kind of the worry, what behavior is this going to encourage?
So that's really what I didn't get my question. I don't
Speaker 2
think there's other I mean to me, It'll be interesting to watch, let me see. I think the only deal that I know of right now, well, Chevron has a package in Central Basin Platform, Oxy has a package in the Delaware. So there's a few other deals that are out there. It'd be interesting to see what they go, but it I don't know of any other privates at this point in time that are going to be able to sell In this marketplace.
Speaker 12
Okay. Thank you. My follow-up is, Neil, there's probably a few housekeeping data points, if you may. And it's that chart you referenced in Slide 13. So how do you see your breakeven oil price and sustaining capital evolving?
And given this is about a 13 year inventory, I wonder if you could just elaborate on the accretion math because It's easy to accrete on the cash flow when you're using stock, but if you look at the $6,500,000,000 value versus a DCF of 13 years Both free cash flow and value accretion is not obvious unless you take make a call in the oil price. So can you just walk us through how this changes Pioneer's sustaining capital and how exactly you're defining accretion?
Speaker 3
Yes. I'll start, Doug, on the just sustaining capital. And sustaining capital, it kind of depends on where you measure it from, as you know. And so generally, we look at what I'll call maintenance capital Towards the end of the year, clearly, we've got from Q4 of 2020 to Q4 of 2021 We've got the Double Point in Full and Parsley. And so when we think about maintenance capital, we'll come out later this year really based on Q4 of what that maintenance program looks like, but we kind of got to roll that forward until then before we and kind of get all the pieces together.
So it's still early for us to really say what that sustaining capital is to keep production flat long term just because we still need to incorporate and embed all these assets that we've brought together And the growth profile that we have this year. So stay tuned on that
Speaker 1
and that will come later this year. And Doug, this is Neil. On the modeling and the accretion, I can tell you the way we approached this, we really did a well level stick by stick, rolling the rigs in for our fleets in on an annual basis, understanding the synergies that we can bring to bear both on the Parsley Double Point transactions, looking at our operating cash flow, the capital necessarily embedded within those annual years and then the free cash flow that we generated and then applied that in terms of how was it accretive, what did it do to ROCE, what did it do to Croce. And as Scott said earlier, the benefit to ROCE and Croce were positive. The benefit to free cash flow was a double digit accretive.
And really what we're looking here and as Scott alluded to on that Pioneer model, I mean it really comes back to the model and the assets. The assets And what they provide us and allow us to do, really drive that free cash flow generation with the high margin wells, with the low cost of capital we can bring to bear. It's our goal and our ability, when I think about valuation as you and I have talked about in the past, we look at free cash flow. E and Ps tend to trade in a pretty tight band historically on EBITDA. It's our goal that Pioneer will be able to disaggregate itself from that tight band in which E and Ps trade to trade consistent with other companies and other names and other sectors that generate a high level of free cash flow and return that capital to shareholders.
I mean that is our long term vision and our long term goal really to drive that appreciation and accretion and have it manifest itself within the stock price by returning that capital to shareholders over the course of time on an annual basis.
Speaker 12
Thanks for the full answer guys. And as you well know, Neil, the multiple is the output of the free cash flow. So I appreciate the reaffirmation of that. Thanks again.
Speaker 1
You got it, Doug. Thank you.
Speaker 0
Thank you. Our next question comes from Nitin Kumar with Wells Fargo.
Speaker 13
I want to revisit Slide 7. We really appreciate the look on the free cash flow opportunity. Could you talk to do you see any tax leakage associated with that, I know you talked about strip and 5% growth, but what is the tax impact? $23,000,000,000 is a lot of money.
Speaker 3
Tyler, at the end of the Q1, we have about an $85 NOL. Because if you see the increase in commodity prices and free cash flow, price deck that's moved up to something higher in the 23 range now, but that As prices have moved up, that's also accelerated our tax liability. And so when we're looking at it before, we're in that 25, 26 time period of paying cash taxes with the improvement in commodity prices and the free cash flow from the synergies and the things that we're doing internally, That's accelerated that into that 2023, 2024 time period now. So that's what's built into the model is that trajectory of paying cash taxes. So Hopefully that answers your question.
Speaker 13
Yes, it does. And look, making more money means you pay more taxes. That's life. Scott, my other question was for you. I appreciate the comments about the scale of Pioneer in the Midland Basin and Especially the leadership you've had as a company in terms of greenhouse gas emissions.
As you look forward, are there opportunities in terms of Given your scale where you can participate selectively in green revenues, I'm thinking of Carbon Capture or other technologies. Have you looked at that?
Speaker 1
Yes. Some
Speaker 2
of the things we're doing. We do have 40,000, 30,000 acre ranches services that we're looking at both wind and solar arms on those. We're waiting for the extension of the tax credits on both of those in the infrastructure bill To go out to the marketplace. Secondly, we're starting to electrify a lot of our practices. I see over time moving from diesel to natural gas or moving from natural gas to the grid.
We'll be doing that. We're not getting as fast as the majors are, our oxygen is in the carbon capture. We're evaluating and studying it.
Speaker 0
We did have we talked about
Speaker 2
our enhanced oil recovery project, which is starting in the Q3 for re injecting white gas, but we do know that CO2 does work, it forces in white gas.
Speaker 13
Excellent. Thank you for the answers guys.
Speaker 0
Thank you. Our next question comes from Arun Jayaram with JPMorgan. Please go ahead.
Speaker 14
Yes, good morning. My first question is just thinking about 2022. Scott, you mentioned how production could exceed, call it 700 MBOE per day. I was trying to think about what kind of oil mix would you anticipate and some of the pushes and pulls on CapEx as we think about synergy capture from both deals, Simulfrac, etcetera, and just trying to think about the 2022 outlook.
Speaker 3
Yes, Arun, I would say from an oil percentage and we still believe we're going to be in that 58% range is where we've been running. And so I don't anticipate maybe plus or minus 1% in there, but that's really the mix on that 700,000 plus BOEs a day. In terms of capital, I think it's still just early. We're trying to get everything incorporated, get the synergies captured, look at the where we can Get more capital efficient for 2022 just on facilities and tank batteries, longer laterals. So there's a lot of moving parts.
So it's hard for me I'll tell you today, I would tell you that long term, we still believe that we have to add to grow at 5% 1 to 2 rigs. And so that's for modeling purposes, I'd still assume that In your capital outlook. Got it. Hopefully that helps.
Speaker 14
Yes. And will the water system be a potential a source of synergies as well. Rich, thinking about 2022?
Speaker 3
Yes. I think when we look at the Midland system is coming on mid this year. So it just adds from an ESG standpoint, it improves our ESG of getting off of fresh water, but it also adds some of our cheaper sources of water or the effluent water from the cities and our reuse facilities. So all those are getting in the mix and Yes, we've got a very complex algorithm of how we use water. So it takes into account the source cost of the water, but also how much we have to transport it to get by location.
It's a complex thing and they optimize it to make sure that we're getting the biggest benefit we can. So all those things will play into the 2022 capital budget for sure.
Speaker 14
Okay. And my follow-up is just post the Diamondback print. One of the questions we've gotten was given the close of Double Point is what is the timing on the registration of the shares that you're going to issue to private equity as part of the transaction?
Speaker 3
Under the agreement, we had a short period of time afterwards. So that work is Basically, I can't remember it's actually been done yet or is coming in the near future, but it was just part of the transaction to get those registered after closing. I just Can't remember if those are done already or will be early next week.
Speaker 14
Okay, fair enough. Thanks a lot. Sure.
Speaker 0
Thank you. Our next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.
Speaker 15
Yes, thanks. I appreciate it. A big picture question on obviously the narrative of what generating the $23,000,000,000 of free cash flow going forward. And I apologize, some of your answers, Scott, had been a little bit choppy with the line. So it may Run over on the question on your view on hedging, but maybe big picture holistically on the macro at this point.
You've obviously We talked about jet fuel being something that may take a little bit of time to obviously come back. We do see very robust oil prices right now. You've got pretty good visibility on the curve on free cash flow. So what is your view on the macro? Is it going to continue to strengthen In your view, so it doesn't make sense to hedge or should you really start locking in some of these prices to obviously recognize some of the free cash flow, because as we know, oil can be quite volatile.
Speaker 2
Yes. The I talked earlier about the positive macro. We're probably going to pick up about 5,000,000 barrels a day of demand. The rest toward the end of the year. We'll pick up another 2 in 2022 and pick up another 1 to 2 in 2023.
A lot of that as you said is jet fuel and international travel. And so we're going to pick up 8000000 to 9000000 barrels a day, be back up to 100000000 to 101 The key is there's no extra supply. And so I think the market is going to continue to be tight over the next 2 or 3 years. So For that reason, I think the price will continue to move up. It will test where demand starts falling off.
And now if you go back to the 2012, 2013, 2014 time period, even though we had a supply issue there, we're not going to have a supply issue there. The oil price got up to $80 to 100 So, I think it easily test those prices over the next few years. So, we will probably do less hedging if it gets up into that 75 to 100 range, you'll probably see us continue to do some three ways At that point in time to protect obviously both the base and the variable dividend.
Speaker 15
Okay. And when you say 75?
Speaker 2
Not as high as we've done in the past.
Speaker 15
And when you say 75 to 100, you're talking Brent, is that right?
Speaker 12
Yes.
Speaker 15
Okay. And going really quickly to Page 15, and Joey, I think you obviously pointed out This chart which positions you as obviously a very on a relative basis clean producer of oil. Have you guys gone down the path of looking at responsibly sourced oil. Obviously, there's some RSG efforts that are going on. Is there any opportunity down the road for you guys to get a premium for your barrel because you do have a relative low emissions?
Have you explored that or is that something that could actually occur?
Speaker 3
We're just in the initial phases of looking at that. And so, yes, more to come on it. We don't have I don't have a good answer for you right now other than that it's something that we're looking at and getting educated on and more to come in the future.
Speaker 15
Fair enough. Thank you.
Speaker 0
Thank you. And our next question comes from David Heikkinen with Heikkinen Energy Advisors. Please go ahead.
Speaker 10
Good morning, guys, and thanks for taking the question. As you think about your current well cost after the $200,000 or $300,000 savings, where do you stand now?
Speaker 3
Currently, we're in that $6,300,000 to $6,400,000 range if you look at our capital budget and completions and that's what it would average out to be. Okay. And then we're trying
Speaker 10
to think through the Double Point acquisition and the 1200 locations you added. Like As you allocate some of that purchase price to those undeveloped locations, it's several $1,000,000 per well. How do you think about the burden of the acquisition price on that inventory.
Speaker 3
It's not unlike we did parsley, I mean it's going to get booked in our undeveloped property. But as Neil talked about earlier, I mean, our evaluation on this was looking at it from a bottoms up well by well standpoint and what the valuation of these wells. And so it will just get moved over as we develop those, but we'll prioritize Those in the hierarchy just like everything else and look at the synergies and the longer laterals and it'll just all just we're going to do whatever is most capital efficient and Generate the highest rate of return in free cash flow. So that's what's how we have always done capital allocation and we're going to continue to do it that way.
Speaker 10
So it doesn't ding the asset economics for those locations versus your other, you think about that as a sunk cost in your undeveloped inventory from here forward?
Speaker 3
Yes, once it's in inventory, that's right. Yes. Okay. That's what I thought. Thanks.
Speaker 0
And we have no additional questions at this time. I'll now turn the conference back to our presenters for any closing remarks.
Speaker 2
Again, we apologize for our 5 minute interruption. Again, thank you for listening to the call. Look We're excited about that. So I look forward to seeing you all. Take care.
Speaker 0
And this concludes today's call. Thank you all for your participation. You may now disconnect.