Pioneer Natural Resources Company - Q2 2021
August 3, 2021
Transcript
Speaker 0
Welcome to Pioneer Natural Resources Second Quarter Conference Call. Joining us today will be Scott Sheffield, Chief Executive Officer Rich Daley, President and Chief Operating Officer Joey Hull, Executive Vice President of Operations Anil Shah, Senior Vice President and Chief Financial Officer. Pioneer has prepared PowerPoint slides to supplement their 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 August 30, 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 Tu of the slide presentation and in Pioneer's public filings made with the Securities and Exchange Commission. At this time, for opening remarks, I would like to turn the call over to Pioneer's Senior Vice President and Chief Financial Officer, Neel Shah. Please go ahead, sir.
Speaker 1
Thank you, Kian. Good morning, everyone, and thank you for joining us for Pioneer's 2nd quarter earnings call. Today, we will be discussing Pioneer's strong second quarter results and our enhanced return of capital strategy. We will also present our continued strong execution Underpinning our low reinvestment rate and best in class breakeven oil price. This is all accomplished while maintaining our focus on safe operations and Environmental Stewardship in the field.
After that, we will open up the call for your questions. With that, I'll turn it over to Scott.
Speaker 2
Haire. Thank you, Neil. Good morning. Obviously, we're very excited after talking about it for 18 months to announce that we are both accelerating our first variable dividend Payment into the Q3 of this year as well as increasing the payment to reflect 75% of 2nd quarter free cash flow. After payment of the base dividend as our balance sheet continues to strengthen, we're due to higher strip pricing as a result of improved oil demand and successful Vaccine.
In addition, we had 2 highly accretive transactions that also led us to making this decision and accelerating. Hennepin. When combined with the base dividend, total dividend payments in the 3rd quarter will be greater than $2 per share or a total of approximately $490,000,000 return to shareholders during the Q3 alone. The initiation of our variable dividend payments marks a significant milestone in our investment framework as shareholders will begin receiving Material cash returned through 8 dividend checks per year. Pioneer's strong execution continued during the Q2 with production near the top end of guidance, delivering over $600,000,000 of free cash flow, driving estimated 2021 free cash flow up to about $3,200,000,000 Lastly, Pioneer is the largest producer in the Permian with the largest inventory of Tier 1 locations over $15,000 and the lowest breakeven price in the Lower forty Acquisitions were highly accretive and added significant Tier 1 inventory.
We are not looking at any more Midland Basin large acquisitions. Who bought the best 2 available. Apollo, who was the largest shareholder from Double Point, our largest shareholder from Double Point H. C. H.
Sold down from 13,000,000 shares to about 2,000,000 shares and now on less than 1% of the outstanding of the company. Going to Slide number 4. Pioneer's execution remains strong as total production and all production were in the upper half of our guidance ranges as we successfully integrated Double Point's operations into our program. Horizontal lease operating expense dropped by nearly $0.25 per BOE when compared to the Q1. In total, Pioneer generated approximately $1,000,000,000 in free cash flow in the first half of twenty twenty one.
We're going to Slide number 5. Our strong balance sheet underpinned by improved oil price outlook Hill, supports both the acceleration and increase of our inaugural variable dividend. The first variable dividend we paid during the quarter accelerated from 22. We based on 2nd quarter free cash flow. Additionally, we're increasing the 3rd quarter variable dividend payment to 75% Post base dividend free cash flow from the previous 50%.
The increase up to 75% in our variable dividend program is approximately 18 months sooner than previously planned. These changes result in over $1,000,000,000 of incremental cash to be returned to shareholders in 2021 with total dividends to exceed $6 per share. On Slide number 6. We remain committed to our core investment thesis Predicated on low leverage, strong corporate returns to average over the next 5 years in the mid teens, low investment rate around 50% over the next 5 years and generating significant free cash flow. This durable combination creates significant value for our shareholders, delivering a mid teens total return through our stable and growing base dividend, Compelling Variable Dividend Program and High Return All Growth up to 5%.
Obviously, when you look at 2022, the turn on return is much higher because the all strip over the next 5 years is about $10 in backwardation. Hutt. When including the base dividend, approximately 80% of the company's free cash flow is expected to be returned to shareholders through 8 separate dividend checks per year, inclusive of both the base and the variable dividend. We will continue to maintain a pristine balance sheet as we allocate the remaining portion of free cash flow to the balance sheet. Going to Slide number 7.
As you can see on Slide 7, the product of Pioneer's high quality assets and top tier capital efficiency, drive significant free cash flow generation, amounting to greater than 23,000,000,000 through 2026. Again, I want to remind you that the strip is in backwardation. It drops about $10 in backwardation over the next 5 years. This cumulative free cash flow, which is based on current strip pricing, represents greater than 50% of our enterprise value and more than 65% of our market cap. Considering the greater $23,000,000,000 of cumulative free cash flow.
This program generates over $18,000,000,000 of total dividends through 2026, with the remaining free cash flow allocated towards strengthening our balance sheet, driving net debt to EBITDA to less than 0.5. Going to Slide number 8, positioning a leading dividend yield across all sectors. The combination of Pioneer's expected Free cash flow and return of capital framework creates a compelling investment opportunity with a total dividend yield that will exceed all S and P 500 secondtors as well as companies and the average yield of the major oil companies and all other energy companies in the S and P 500. Annualized expected dividends paid in the second half of twenty twenty one leads to a dividend yield of approximately 8%, which increases 22 to 20 26 time period to an average greater than 9% due to significant free cash flow. Again, when you look at just focus on 2022, the dividend yield is about 12%.
Again, a reminder, the strip with these numbers is about $10 in backwardation. This highly competitive yield is underpinned by the greater $18,000,000,000 of cumulative cash returned to shareholders outlined on the previous slide and speaks to the power and underlying quality of Pioneer's assets. Let me turn it over to Rich for the outlook. Great.
Speaker 3
Thanks, Scott, and good morning. Before I start on the slide, I just wanted to give a special thanks to our entire Pioneer and Company. Including all the great people that came over from the Parsley and Double Point transactions for the excellent job they've done in integrating both transactions this year. Well, we have a few small items left on Double Point. The teams have worked extremely hard and have done a tremendous job seamlessly integrating these operations in a very short period of time.
So thank you to all those that are listening. Turning to and looking at slide 9, you can see on the slide here there's no change to our Full year oil production guidance range of 351,000 to 366,000 barrels of oil per day and total production of 605,000 to 631,000 Similarly, on capital is unchanged at $2,950,000,000 to $3,250,000,000 but we are seeing some inflationary pressure, Although most of it is being offset by our efficiency improvements by the great work of our drilling and completions and facilities teams. Looking at cash flow, you can see with the increase in commodity prices, our forecasted offering cash flow has increased to $6,450,000,000 and free cash flows increased to $3,200,000,000 as Scott talked about. Both of those are up $500,000,000 from what we forecasted in our May call related to Q1 earnings. Turning to Slide 10.
Our plan remains unchanged and is set to average between 22 and 24 drilling rigs for the full year. We are currently running 24 rigs and 8 fracs fleet in the Midland Basin. In terms of our Delaware plans, we are moving multiple rigs into the Delaware Basin this quarter and the team is looking forward to bringing the same efficiency gains We've achieved in the Midland Basin to the Delaware with the goal of further improving well returns, especially given the higher oil cut and lower royalty burden in our Delaware acreage. Just for reference, the Delaware production was 70% oil during Q2. As you can see here, with over 1,000,000 acres in the Permian Basin, we have a significant inventory.
So we will continue to evaluate opportunities to monetize and I will now turn the call over to Scott. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Our next question comes from the line of Scott Acreage packages as well as evaluating other DrillCo opportunities.
Turning to slide 11 and talk about synergies. You can see here from the slide that we have realized $275,000,000 synergy target related to G and A and interest and on both the Parsley and Double Point transactions. On the operational synergies. We've made great progress with over 50% of the target synergies being identified and being incorporated into future plans. For instance, we have leveraged our supplier relationships.
We're seeing savings on pressure pumping, wireline, cement, casing, among other items. Joey will talk more about it. We've successfully tested our Simulfrac and have incorporated a second Simulfrac fleet into our program, with Bennett which benefits mainly Pioneer, Parsley and Double Point Acreage given our leveraging our significant water system that we have across the Midland Basin. The teams are also continuing to optimize future development plans, take advantage of existing facilities and infrastructure, including tank batteries, water disposal, reuse facility, just to name a few. Obviously, this reduces the need for future new builds.
And lastly, just as examples and which is significant, The team has identified over 1,000 locations that we can drill additional 15,000 foot laterals across our contiguous acreage position That are being incorporated into our future development plans, providing significant improvement in capital efficiency going forward. Why don't I stop there and I'll turn
Speaker 1
it to Neil. Thank you, Rich. On Slide 12, you'll see Pioneer's high quality asset base, which yields a peer leading oil percent that drives our high margin barrels, positioning Pioneer as the only E and P amongst our peers Realize a corporate breakeven below $30 a barrel WTI. This pure leading oil mix combined with our unparalleled breakeven oil price in the high 20s not only underpins our operational and financial strength, it enables Pioneer's low reinvestment rate and drive significant and durable free cash flow and return of capital to shareholders well into the future. With that, I'll turn it over to Joey to discuss our strong operations.
Speaker 4
Thanks, Neil, and good morning to everybody. I'm going to be starting on Slide 13, where our drilling and completions teams have continued and Company. Their continuous improvement journey. As you can see since 2017, these two teams have seen more than 75% improvement in their completed feet per day and more than 65% improvement in their drill feet per day. This journey is even more impressive when considering our increased activity levels, including the integration of Parsley and Double Point.
As Rich mentioned, we've also seen the continued success of our simulfrac operations. Consequently, we're in the process of starting up our 2nd Simofrac fleet. Our capital projects and production operations teams are working diligently to upgrade Parsley and Double Point Facilities to our operational environmental standards and our teams are progressing our ESG initiatives by and Company. We continue to see tremendous performance in our production operations, construction and water management teams. And as always, none of this would be possible without the great effort from our development planning team, our robust supply chain and all the groups that support our operations.
We continue to remain focused on keeping our employees and contractor partners safe, delivering peer leading performance and reducing our environmental footprint. Congrats to the entire Pioneer team for our safe and efficient execution in Q2. I'm now going to move to Slide 14. Here you can see the results of Pioneer's long standing commitment to meeting high environmental standards by our top tier flaring intensity and best in class intensity compared to U. S.
Peers and majors. This was only made possible through years of thoughtful planning and investments to minimize our emissions at our facilities, Coupled with our comprehensive leak detection repair program, which includes routine aerial surveys. Despite our leadership position, Pioneer's goal of reducing greenhouse gas emissions intensity by 25% and methane emissions intensity by 40% through 2,030 demonstrates our commitment to further increasing our environmental standards. And now moving to Slide 15 and continuing the storyline from the previous slide, Einer also produces extremely low emission intensity oil on a global scale. This combined with our low breakeven results and exceptionally resilient production We expect will have a place in the global marketplace for a very long time.
And with that, I'll turn it back over to Scott to wrap things up.
Speaker 2
Hahn. Thank you, Joey. On Slide number 16, Pioneer continues to hold all pillars of ESG of great importance. I think one of the most important points with the recent Rystad report, the Permian Basin has declined over the last 18 months since we've been talking about it from about a B a day to less than $200,000,000 a day in regard to flaring. So people are focused on reducing flaring to less than 1%, almost all companies.
We continue the biggest flares continue to be the private companies in the Permian and we continue to ask you in regard to if you finance your private equity, we got to put pressure on the private companies in the Permian Basin. Hennigiel. We continue to promote a diverse workforce, which reflects the community in which we live and work. As you can see, when you look at our top of 15 individuals that run the company, and we're at 47%. Lastly, we would like to welcome Lori Billingsley to our Board of Directors.
Lori is an Officer of D and I with Coca Cola. We're very excited Tehavar experience and her leadership play a pivotal role in navigating the changing global energy landscape. Our 2021 sustainability report is scheduled for release in the Q3, which will include Pioneer's progress on the environmental targets outlined in the left portion of the slide. And finally, on Slide 17, Pioneer is committed to driving all of these values for our shareholders. Now we'll open it up for Q and A.
Speaker 0
Thank Beaker to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Anderson. We can now take the first question from Neil Mehta from Goldman Sachs.
Speaker 5
Haire. Yes. Thank you very much. Appreciate the timing. Congratulations to you guys in introducing this variable accelerating the introduction of the variable contracts that you've been talking about.
I guess the first question is just Can you give us a sense of how you're going to plan on updating the market around the variable dividend? Is this something that we should expect on a quarterly basis on a go forward. And then also just talk about, as you look forward, the right payout ratio, do you see The potential for this variable dividend payout to continue to move higher over time.
Speaker 2
Yes, Neil, thanks for the opening comments. As you know, the bottom of our slides, Everything, including the base is subject to Board approval, but our long term intention is to pay up to 75% of free cash flow every quarter for the next several years. That's how we're running our business. With the number of locations that we have, we have over 15,000 locations. We're drilling roughly about popping up around 500 a year.
So we have probably the largest inventory of anybody out there. So we can go on and produce 5% growth and deliver strong yields for the next several years. So It should be the go to energy stock, if you're focused on dividends. We're focused on dividends primarily it was because of the feedback When we talk to all of our shareholders back over the last 18 months, that was the focus feedback that we got. They really don't want buybacks.
If they want to take the dividends and buy back our stock, they can do that. They want the ability to invest The dividends in any stock they want to was the feedback that we got. So that's why we're focused and we have the greatest payout up to 75%. So the variability obviously will be commodity price. One of the feedbacks we will ask for, we do not plan to do any hedging in regard to the variable dividend.
If we do any hedging, it will be at the very, very low end, it will be to protect the capital budget and balance sheet. If shareholders want us to protect the variable dividend, they'll have to give us that feedback in regard to hedging. I'll stop there.
Speaker 5
And it sounds like we'll get an update on the quarterly on the variable dividend on a quarterly basis Going forward. Okay. And then the follow-up is just around M and A. So two questions around this. One is, can you provide a little bit more color in addition to what you provided in Slides here about capturing the synergies associated with the Double Point transaction.
And just in general, do you view this as a buyer's or a seller's at the market as it relates to A and D at this point. In other words, are you at the point as Pioneer given the inventory
Speaker 3
Yes, Neal, it's Rich. Our focus is really on executing our program related to the Parsley and Double Point transactions along with the base Pioneer. On the synergies, I think as I mentioned, we've captured the G and A and interest. We're focused on the operational side and identified over 50 Those that we're focused on incorporating into our plan, including simul frac that Joey talked about, the longer laterals, integration of our facilities capital and using that integration capital that we spent to are spending to upgrade the facilities related to Parsley and Double Point to our high operational standards. And you'll see that when you see our sustainability report come out that some of the dollars we've got high standards that we want to adhere to and you're going to see that in our sustainability report.
And so those dollars are being spent to accomplish those activities.
Speaker 2
And on your second question, Neil, As I said, we had 2 became available, Parsley and Double Point. They were the best opportunities. They had great Tier 1 inventory. We bought them and there was nothing available at the current time. And I don't anticipate anything becoming available.
So there's no need for us to look at further opportunities at this point in time.
Speaker 6
Terrific. Thanks, guys.
Speaker 0
We will now take the next question Ching from John Freeman from Raymond James.
Speaker 7
Good morning, guys.
Speaker 6
Hennigiel. Hey, John. Hi, John.
Speaker 7
It's great to see the variable dividend paid well ahead of schedule and obviously the mechanics of at variable dividend payout you have laid out really well. I'm trying to get a sense though on when I look at the base dividend, sort of how the mechanics or maybe the thought process works on the base dividend side of things. I know Scott in the past you've talked about that long term plan assumes kind of roughly like a 2% to 3% per year kind of average increase in the base dividend. So If the variable dividend, as I've said in the past, the main sort of toggle there is the commodity price, is the base dividend, Is it mainly just sort of linked to the balance sheet as leverage goes lower that gives you the ability to raise that? Just any additional color on the base dividend?
Speaker 2
Yes. On the base, we're still building in just as you said that 2% to 3% Increasing the base that's still subject to Board approval, but that's our intention is on an annual basis over the next 5 years to increase the base. So as we increase the base, Keeping the strip the same, it reduces the variable a little bit. So
Speaker 7
Got it. And then just my other question, is there any update yet on the Delaware? We've got the and Regner and we're starting to drill those initial wells as that area looks to try to compete for some capital. Just Any updates on what you're seeing in the Delaware on the early results?
Speaker 3
Yes, John, we're just getting started. We're just this quarter, we're putting our first rigs And so we'll have more data into this year into next year on performance, but we fully expect to Bring the operational benefits that we've seen in the Midland Basin to the Delaware Basin. We're excited to get started over there, but it's just early at this point. So I don't really have any results yet to share until Yes, probably early 2022.
Speaker 7
Got it. Thanks, guys. Congratulations.
Speaker 8
Hynes. Thanks.
Speaker 0
We can now take the next question from Derrick Whitfield from Stifel.
Speaker 9
Good morning, all. Congrats on your quarter and variable dividend update. With my first question I wanted to focus on ops, perhaps for Joey. Are there any practical limitations that can limit your deployment of Samuelfrac ops program wide?
Speaker 4
Yes. One of the questions I get quite often because of the great success we've seen on Simulfrac is why not convert all of our fleets to Simulfrac. And there's a couple of things that limit that. One is logistics, particularly around water, Because we basically doubled the water requirements in one area, if all of our frac fleets were working under simulfrac operations, we'd have to spend a significant amount of capital to upgrade our water systems and of course logistics around sand as well. But the other maybe more trivial The matter is also the number of wells on the pad.
If you have an odd number of wells on the pad, it can have a slight impact on the efficiency, but primarily we want to make sure that we're efficiently deploying capital And we're getting the bang for the buck. So water logistics is probably the single most impactful thing that we look at to deploying Simulfrac.
Speaker 9
Understood. And staying on ops with my follow-up question. Harness. I wanted to ask a 2022 activity question. As you guys internally prepared for 2022 from a permitting and infrastructure perspective.
Are there any broad activity outlines you could share with us on average pad size and lateral lengths that are possible for 2022?
Speaker 3
Yes. I think as we've talked about in Pass. As we talk about that pad size of basically 4 wells per pad on ABLO4 this year, I think that's going to be Fairly consistent for 2022. And then when we talk about longer laterals, we're still in the midst of developing the exact locations for 2022 and how many of the longer laterals we'll drill, but it will be definitely a bigger part of our portfolio in 'twenty two than what has been in the past and in 21 as we've looked at that and obviously the capital efficiency of drilling longer laterals continues to improve. So it's probably overall on 15,000 foot laterals on a drilling and completions per foot basis, 15 plus percent cost savings on an average per foot basis.
Speaker 9
Great update and thanks again for your time.
Speaker 0
Sure. We can now take the next question from Doug Leggate from Bank of America.
Speaker 10
Thanks. Good morning, everybody. Scott, I've got 2. I think they're probably both for you. And I guess the first one is on both related to M and A.
There's obviously been some a little bit of criticism over the price of the DP acquisition. Obviously all stock means your share price given where it is today. You have an opportunity to reset the acquisition cost by buying in some of your shares. Now I understand the variable dividend policy, but I'm just curious if that ever occurred to management or The opportunity that's been given by this overhang that you clarified. The implied acquisition price is a lot cheaper today if you like and you have a chance to lower that cost by buying in your stock.
Why not?
Speaker 2
Yes, Doug. First of all, I think the market totally misunderstood the Double Point transaction. When you look at unproved property and each of you all can do that on our balance sheet. We paid the same exact same price as we paid for parsley. It's in the low $20,000 per acre.
So anybody is criticizing us for paying 40,000 per acre had no idea what they're talking about. Secondly, it was a great transaction. In regard to buybacks, I'm listening to the shareholder base. As we drive our debt EBITDA below 1. I have stated already in prior conference calls that the We will definitely be subject to Board approval.
We'll be buying back stock when we see dislocations. So I'm a firm believer when we're at the bottoms of the markets like we saw last year. I want to have one of the best balance sheet, so I can buy a lot of stock at $50 And so I think buying it at today's price, I think I'd rather distribute all of our cash flow, 75% or 80% of it back to the investor. So I sort of agree with you, but at the same time, I'd rather save my firepower If we see I hope you don't see dislocations like we saw last year in the marketplace. I've got more confidence in what OPEC is doing in creating stability, less volatility than we've seen in the last 5 years, over the next 5 years based on what's happening, what's happening with the U.
S. Shale and other places around the world. So that's how we're thinking today.
Speaker 11
Okay. I appreciate that.
Speaker 10
I'm certain, Mickey, we can take the acreage math Offline. I think that's the output rather than the input, but I completely agree with you. My follow-up, Scott, is
Speaker 12
A little bit more of
Speaker 10
an obtuse question. The Cimarex Cabot S4 came out and appeared at least If we join the dots to suggest that Pioneer had taken a hard look at Cabot. So enlighten everything that you've said about the 2 best opportunities being Parsley and Double Point. I wonder if you could help us understand the thinking that might have gone into that and whether you would rule yourself out of the possible shell cocky jets for sale in the Delaware.
Speaker 2
Yes. During the extreme downturn, we had a lot of discussions with and a lot
Speaker 0
of different
Speaker 2
CEOs, obviously, just like Exxon and Chevron did at the top. And so we don't comment on specific opportunities, but we were looking at Parsley Early on and continued to look at Parsley oil during last summer. So, we're 100% focused on the Permian Basin and probably 99.9% focused obviously on the Midland Basin. So that's where our focus lies.
Speaker 10
All right. Thanks for trying to answer the question. Appreciate it.
Speaker 0
We can now take the next Question from Charles Meade from Johnson Rice. Hanon from RBC Capital Markets.
Speaker 13
Haire. Yes, thanks. Congrats on the quarter. I'm going to ask a question, maybe a little bit more again back to the hedging in your strategy there. And certainly, I have to commend you for your effort to listen to investors and then appropriately adjust your business model.
But What feedback have you been getting from investors to this point on hedging? And has that Determine the path you're moving forward at this point in time.
Speaker 2
Yes. We have due to what's happened with COVID-nineteen and the ability to travel. We're just now going to start getting out over the next few weeks and talk with several shareholders. Obviously, the conferences, it's sort of hard to get feedback during those virtual conferences. We like to do it in 1 on 1 meetings.
So you're going to see the Pioneer team over the next 8 to 10 weeks travel throughout the U. S. And talking to shareholders. So at this point in time, I'll have to reserve the feedback on what they give us in regard to hedging, in regard to the variable dividend. So probably it's a good question for us in November to ask.
Speaker 13
Okay. So this is still a developing sort of thought process going forward because I guess the point I would make is that certainly with your $23,000,000,000 of free cash flow outlook and obviously and I think you've Stated a pretty strong return to shareholder plan with that. To a certain extent, obviously, that's underpinned by operations, but also The current commodity price and so obviously we know oil is volatile. It looks good now, but like The thought process is like why put that at the $23,000,000,000 of free cash flow at risk when you can lock some of that in, but it sounds like that's something that you all need to evaluate a little Furthorpe shareholders. Is that sort of right?
Speaker 2
Yes, that's right. That's because it's totally changed. We used to Spend every dollar to drill a well. It would protect the capital budget primarily. And now we're The free cash flow essentially all most of it all goes back to the shareholder base.
So we're going to visit with our shareholders to get feedback. So there probably won't be consensus among them, but just something that we've done historically is get shareholder feedback and Develop our long term policies.
Speaker 13
Absolutely. Look forward to it. Thank you.
Speaker 0
We can now take the next question from Charles Meade from Johnson Rice.
Speaker 12
Good morning, Scott and team. Am I live this time?
Speaker 2
Yes, it's working. So sorry about last quarter.
Speaker 12
Maybe not sure what happened. But anyway, Scott, I apologize I had time for belaboring this A and D question, but in your prepared comments, I believe I heard you say we're Oh, well, are you guys looking to tack on in the Delaware Basin? But maybe the right way to think about it is that really you're at your core Our Midland Basin Company. And so you really the way to interpret that is that you really just focus on the Midland Basin as the future of Pioneer. So How should we interpret that?
Speaker 2
Well, it's 95% of our company and our locations is the Midland Basin, so that's why I say that the Delaware. As Rich said, we're focused on drilling wells. We're moving in several rigs. We're averaging 1 rig, but we're moving in more than 1 rig for a short time frame, and we need to develop our own economics. The returns at today's price Looked tremendous in the Delaware also.
And so higher oil prices go, the Delaware is close to being equal with the Midland Basin. So its inventory moves up significantly in the $60 $70 range versus the $40 to $50 range. So we're just focused on our current asset base and try to Get every dollar back to the shareholders where we're focused on both the Delaware and the Midland Basin. We are continuing to do trades. I think Rich may have mentioned we're doing DrillCo 2 on our Tier 2 properties.
We'll continue to look at small divestitures. So there could be some small opportunities on the small side, but it's insignificant and doesn't affect free cash flow. And that's where the focus is.
Speaker 12
Got it. Thank you. And then, Scott, I wondered if you could offer your more kind of maybe macro thoughts, but maybe not so much on price. But what do you think the world is expecting to see in terms of Volume growth from U. S.
Onshore in 2022. And what do you think they're likely to get versus those expectations?
Speaker 2
Most of the numbers I look at, EIA has the highest numbers. They're at 11.85. I think they're way too high. Most of the other main tanks that I look at, they're around 11.5%. That's probably more realistic.
But I'm still looking at about a 5% growth in the Permian and most other basins will be flat to declining. And when you put all that together, we'll be lucky to grow 5% a year over the next several years in the U. S. Lower forty eight. That's my general opinion.
And I think as more companies deliver their free cash flow model, they can't change it. So just like Diamondback's committed to 50, The Cabot Cimarex merger is committed to 50, Devon is committed to 50. So more and more companies, whether they commit to 50 or 75, They're not going to change. And so, I'm getting more comfortable with the fact that just not going to grow that much, U. S.
Shale,
Speaker 0
Question from Scott Gruber from Citigroup.
Speaker 11
Yes, good morning. Just following up on the comments around the appetite to buy back stock during a market dislocation, which makes sense. But just to clarify, Scott, Hutt. Would you approach converting some of the variable dividend to buyback for a period or would you and the remaining 25% of free cash flow to buyback stock as a supplement to variable and base. How would you approach Hallum, bearing in buybacks during a dislocation.
Speaker 2
No, a dislocation is what happened last year Harr in late 2014. That's what I call dislocations when and we want to have the best balance sheet. So our debt to EBITDA gets below 0.5% in 2023. So as it gets down to below $0.5 then we'll have the firepower when we see a dislocation. I'm talking about a major dislocation.
I'd rather buy shares all day long at $50 instead of using firepower to buy shares at $1.40 or 1.50. I'd rather not risk the balance sheet and distribute 80% of our free cash flow back to the investor. So that's the plan.
Speaker 11
Got it. And then just turning back to ops, just given the efficiency gains that you guys are seeing and potential future gains as you roll out SimoFrac and the 15 ks laterals. What is the rig count and frac Kirkout that we should be thinking about for Pioneer to maintain a 5% growth rate in 2022. And then thinking about The inflation that's percolating up through the industry today, how much of the underlying industry inflation do you think you'll be able to offset with efficiency gains around these initiatives next year based on what you're seeing today.
Speaker 3
Yes, Scott, it's Rich. On the just longer term growth plans like we've talked about before, I mean to accomplish the 5% Growth is 1 to 2 rigs that we would add drilling rigs per year to accomplish that. And so that's really how I would from a modeling perspective look at it going forward. On inflation, we are seeing some pressure and fortunately our efficiency improvements and our long term contracts have dampened that. But overall, we're seeing it in tubulars, diesel, cement, chemicals, but we're also starting to see a little bit in labor as well.
And so for this year, we're projecting what I'd call in the mid single digits of inflation, most of which were offsetting with efficiencies. But in the back half of this year, we do expect that to grow to about 10%. And so that's something that we'll have to look at in 2022 of Where do we see inflation versus what efficiency gains we've been able to capture this year. So we're still going to be highly focused on getting efficiency gains, but, I do think inflation is going to play a part in our 2022 capital budget.
Speaker 11
Got it. Appreciate it. Thank you. Welcome.
Speaker 0
We can now take the next question from David Heikkinen from Pickering Energy Partners.
Speaker 14
Good morning, guys, and thank you for taking the question. As I thought through the acquisition and you all really helping clean up the Permian. Can you provide what Parsley's flaring intensity was relative to where you've been as the lowest and Same thing for Double Point. Just trying to put it into a percent, quantify how big an impact the moves you're making in the second and third quarter
Speaker 3
Yes, David, I don't have the exact numbers, but we can get them for you. But They are definitely coming down and making progress. They were higher than where Pioneers were, but I don't have the I can't remember the exact numbers, but like I said, we can get them for you. But definitely Capital that we're from an integration standpoint improving their facilities is a big focus and a big focus on us continuing to lower our emissions footprint. So It's definitely something that we're spending capital on.
Speaker 0
And David, this is Scott. Okay. Thanks, Scott.
Speaker 2
If you look at Rystad, we were down to 1 10th of 1% before the 2 acquisitions. Now we're about a half of 1%. So we're like number 6 in the Permian Basin. Our goal is to get back to being number 1. So that's when you look at the Rystad report, you can get a better feel If you look at it on a quarterly basis.
Speaker 0
That will
Speaker 14
be in your updated sustainability report too. So that will be helpful. Hutt. Did you quantify the barrels of like you have curtailment as you do the pneumatics and you do the VRUs? Maybe I missed the 3rd quarter.
What amount of curtailment did you have? I was just trying to dial in an exact number of kind of that
Speaker 3
Yes, David. I don't have the exact numbers on that. What I'd tell you is our Q3 guidance is right where we expected it to be. And so it takes into account our focus on being capital efficient and making sure that our we're not over defending capital on facilities and choking back wells. So we still as we've talked about in the past have choked back wells to be Capital efficient, therefore, we have lower IP rates and flatter declines.
But also it takes into account this integration capital that we're spending to upgrade the Parsley and Double Point facilities and the time that those are down. So it factors all that in. And so really no change to what we've Forecasted for the full year production guidance is exactly where we are and Q3 is what we would have expected.
Speaker 14
Thanks guys. Keep cleaning it up.
Speaker 0
Anderson. We can now take the next question from Arun Jayaram from JPMorgan.
Speaker 1
Hynes. Yes, good morning. I wanted
Speaker 15
to get some of your thoughts on 2022. Scott, you've outlined up to 5% oil growth and I wanted to get your thoughts on how CapEx Could Trend. There's obviously some pushes and pulls with $150,000,000 of synergy tailwinds from Parsley and Double Point. There's Simulfrac, but obviously some inflation. So I know the Street expectations next year around 405,000 barrels for Kbd for oil and just under $3,600,000,000 in CapEx.
I just wanted to see if you could maybe frame how you think the business playing out relative where the street is at for next year.
Speaker 3
Yes, Ritu, it's Rich. A little too early for us to comment on the details specifically for 2022 CapEx and production. But I'd tell you that we're committed to our investment framework that yields that maximum of 5% oil growth for 2022. And then broadly speaking, I think that equates to what much we said last quarter, excuse me, probably about 400,000 barrels of oil per day for
Speaker 15
Got it, got it. Okay, fair enough. And just my follow-up is in the quarter, you guys return to sales, I think 157 wells. I was wondering if you could maybe give us a bit of a mix between Double Point Acreage versus maybe legacy Pioneer Parsley. And then how would you frame the well productivity on the acquired acreage on Double Point?
Speaker 3
Yes. Our teams did a really great job, as I mentioned early on, about the integration and drilling and pollution efficiencies During Q2 were great, and so that led to the higher POP cadence during the quarter. We do anticipate that to step down in Q3 about 10% to 15% in terms of what that pop cadence will look like. But overall, our production is was For Q2, it was very strong. We're very happy with the performance of all our wells.
I mean, at this point, we look at them all as Pioneer. And so partially Double Point, Pioneer wells all performed at expectation and did well. So everything is progressing just as we would have liked.
Speaker 1
Great. Thanks a lot, Rich.
Speaker 0
We can now take the next question from Paul Cheng from Scotiabank.
Speaker 6
Hutt. Thank you. Good morning. Two questions. First, I think, is for Neil.
Neil, can you give us some idea that how is the cash tax Progression is going to be over the next several years given oil price is $70 plus currently. The second question is that it's just a theoretical. Scott, if we look out for the next, say, 2 or 3 years, if in the event We still see OPEC is curtailing production to support the oil prices. Under that kind of macro environment, will Pioneer still trying to grow at 5% or that should from Pioneer to grow the oil production at all under that type of circumstances.
Speaker 1
Hey, Paul. I'll kick it
Speaker 3
off and I'll turn it
Speaker 1
over to Scott. I If you look at our current NOL balance, it's approximately $8,000,000,000 But if you consider the increase in commodity prices and the forward strip and the expectation for substantial free cash flow profile that Scott and Richard spoke to. Our cash tax time frame Did accelerate into 2023, so that's based on the current strip and our free cash flow generation. So a slight acceleration, but No, good. Based upon the free cash flow profile, if you look at our current portion of taxes, those are state related.
So that's kind of where we sit as it pertains to cash Tax payer and the profile on a go forward basis.
Speaker 3
Yes. In regards
Speaker 6
I'm sorry, Scott, I was just asking you to when you become cash taxpayer in 2023, what type of percent of the represent your total tax for total of life.
Speaker 1
So it starts to layer in, Paul, in 2023. So we're not a max compared to that point, but it does layer in 2023, 2024 and start to step up throughout that time frame.
Speaker 6
Okay. All right. Thank you. Sorry, Scott.
Speaker 2
Yes. On the OPEC question, Paul, the We say up to 5%. So as long as demand is strong, I'm still on the assumption that The Delta variant is going to roll over. People will continue to get vaccinated and demand is going to pick up significantly in the back half of this year And next year going into 2023, so still anticipate strong demand. As long as that's happened, we'll be growing 5% a year.
If for some reason there's any softness, we can actually we can easily back off the 5%, grow 2%, 3%, grow 0. So But right now, we're modeling 5% growth over the next 5 years.
Speaker 6
Thank you. I just want to make one observation or comment on the hedging. Personally, that I actually rather prefer you guys don't hedge. If you look at whether it's a single company or the industry over a 10 year, 20 year or 30 year, whatever you see, hedging is always a losing money type position. I don't think The industry has made money and with your very low breakeven requirement and your very strong balance sheet, not sure that why you want to hedge.
Your investor. We really want to get the upside. Thank you.
Speaker 2
Thanks. Hopefully, you're a shareholder and give me feedback,
Speaker 0
We can now take the next question from Bob Brackett from Bernstein Research.
Speaker 2
Thank you for that. Most of the good questions have already been asked. So let me just chime in, which is uncharacteristic for me and say I truly appreciate the variable and A. J. Rice:] dividend strategy and the oxygen reducing cash return to shareholders and that modest growth.
So I'll just leave it there. Thanks.
Speaker 8
Thank you. Thanks, Scott. We
Speaker 0
can now take the next question from Philip Johnston from Capital One.
Speaker 8
Hey, guys. Thanks. Just one question for me, and it's really just a follow-up on the mechanics of the variable. I think the prior plan was to tie the variable component to the prior year's actual annual cash flow and just sort of pay that evenly throughout the year every quarter, whereas The variable that you announced last night is tied to actual second quarter free cash flow. So just to clarify, will the Variable now always be tied to the prior quarter's free cash flow.
And if so, can you maybe talk about the trade off between The new format, which sort of pays out free cash flow in more of a real time fashion, which I think is a real plus, but it also does bringing a little bit more volatility into this quarterly payout.
Speaker 2
Yes. I mean, it's driven more the fact the oil strip since we announced Our plan in last February, the oil strip, 5 year oil strip, it moved up significantly. We made 2 highly accretive transactions and we saw the benefit of what Devin was doing already. So we decided to go ahead and move it forward. So It will fluctuate, but at least I mean, it's like the Q3 is already pretty is almost closed from a commodity standpoint.
Brent's trading in October already as of now. So, you pretty much know the Q3. So it'll be easy for, I think, analysts and investors To estimate the free cash flow with our models, obviously it will vary. If we had gone the old route, we'd have to wait. It had been delayed 18 months.
That was the negative.
Speaker 8
Yes. Okay. Makes sense, Scott. Thanks.
Speaker 0
Anderson. We can now take the next question from David Deckelbaum from Cowen.
Speaker 16
Hahn. Thanks for squeezing me in guys. I just had a couple hopefully quick ones for you and congrats on the inaugural variable payment. Just curious, Scott, after the Double Point deal, if you look back where the 12 month surplus, I guess, there between then and now, You had a $10 move. Is the plan, I guess, still to drop those rigs and then bring that production down to a level of like 100,000 and Company.
And was there a weighing, I guess, against just maintaining that higher flush production that you had acquired?
Speaker 3
No, that's
Speaker 2
still the plan. No change.
Speaker 16
Huttigler. And I guess just as a follow-up to that, as you talk about this potential for 5% growth every year, Huttig. I guess is this always occurring as like a year end process where there is it's arbitrary in terms of calendar, but Is it making decisions for the following year always sort of in this fall timeframe where the 5% growth would be determined off of that point? Are there going to be points along the way throughout the year or perhaps there's a return based function that chooses you maybe to be positioning for bringing more activity forward at that current point.
Speaker 2
We had to make a decision to go to 5% in 2022 early this year. You can't wait till the end of 2021 to go 5%. You'll end up spending way too much capital. So our capital program is setting us up this year to go 5% with adding very few rigs. If any, we're dropping some this year.
And at most, we'll be adding this year. And at most we'll be adding back 1 to 2 next year. So we have to make the decisions a year ahead of Hahn. That's why it's great. That's why it's best to have a great balance sheet, so you can drill through the cycle.
But we also learned from what happened last year, we can shut down. We shut down How many rigs, Joey, in a short timeframe during the pandemic? I mean, in 2 weeks, we shut down 18 rigs. So I mean, we've gone through so many down cycles over the last 11 years, sad to say that in 2,009, 2014 and then 2020 that we've learned we can make quick decisions at Pioneer And get to a free cash flow. And what's amazing is 2020 was our 1st free cash flow model even in the worst oil price year.
So, but that's how fast we can react and change.
Speaker 16
H. I appreciate the clarity. If I could squeeze in a quick one, just on the affluent water coming out of the Midlands right now, Where do you estimate the amount of the capacity that you'll be utilizing out of that system in 2022?
Speaker 3
Yes, it's still ramping up, but we can have the ability to take up to about 220,000, 240,000 barrels a day from and so it really just depend on logistics and mechanics and hydraulics of the system and where the drilling is and we're going to optimize the lowest cost water, which Midland is One of our lowest cost waters. And so it's that's the game plan and it's still being modeled, but That's basically where we would anticipate getting up to over time.
Speaker 1
Thank you, guys.
Speaker 7
Sheffield.
Speaker 0
This concludes today's question and answer session. I would like to now pass the call back over to Scott Sheffield for any additional or closing remarks.
Speaker 2
Again, we appreciate all the questions. Look forward to seeing everybody and hopefully we can see everybody on the road at some point in time. Stay safe and we'll see you in November. Thank you.