Pioneer's (PXD) recent acquisition in the Midland Basin from Devon (DVN) also added to its core Sale Ranch leasehold. It paid $435M for 28,000 net acres, but the 15,000 in the Sale Ranch area seemed to be its focus. So how good is Sale Ranch? We will let then numbers tells us. Pioneer has 85 completed wells in Sale Ranch. Of those, 51 are horizontals and provide the bulk of current production. 6.5M bbls of crude have come from horizontal completions and just under 1M from verticals. 

(Source: Welldatabase.com)

(Source: Welldatabase.com)

The above curves provide horizontal (purple) and vertical (green) production. As you can see, the initial surge of horizontal production is large. Vertical production is more steady, with a decline that doesn't change much. Operators prefer horizontals because the majority of the production is up front. This means the revenues are larger in the beginning of well life. The sooner a well reaches payback, the sooner those dollars can be used to drill another hole.

The map below provides the location of Pioneer Sale Ranch horizontals and verticals. The horizontals have lines stretched out where the lateral was drilled. Horizontals do not. The beauty of Midland County and the majority of both the Delaware and Midland basins is a very thick payzone. This means verticals and horizontals can be drilled. So an operator may have a small area that still had significant resource left.  It can drill a vertical to get what it missed with horizontals. This is why you see both designs in the same field. It provides significant upside for operators so oil doesn't get left on the table, so to speak.

(Source: Welldatabase.com)

The chart below shows production in Sale Ranch. Horizontal development began in 2011. This is why we see a spike in natural gas (red) and oil (green) production.

(Source: Welldatabase.com)

In an attempt to show how well Sale Ranch does in a low oil price environment, I have used all 51 horizontals production data and used exponential decline to show the economics. The picture below provides the decline of those 51 wells if another well is not drilled.  It does not estimate Pioneer production going forward, just the decline of the wells currently reported.

(Source: Welldatabase.com)

This is a decline forecast of oil production if no new wells are brought on line over the next three years beginning in July of this year. Pioneer has current D&C costs of $7.5MM. I also used Pioneer’s production costs including LOE, Taxes, workovers, and transportation of $8.36/BOE. Natural gas was not figured in the calculation. 

(Source: Welldatabase.com)

I used 62 months, as I like 5 years as a basis for well economics.  As a general rule, locations will produce approximately half of the resource through well life using this time frame. These 51 horizontals will produce $934 million in 62 months. I pulled an NRI of 20%. Using a selling price of $50/Bbl., Pioneer would have a net of $316 million. It equates to a net $6.2 million per well. I used Pioneer's current well cost and LOE. I also pulled taxes. This is a conservative estimate, as Midland wells have a much slower decline rate than other areas. It is possible Pioneer does better than this, but I didn't want to go over board with my calculations. It does show that these wells are profitable at lower oil prices. Right now it would be tough for oil to break through $45/Bbl and Pioneer is well hedged. Keep in mind, this may be its best area, so it does not provide economics for Pioneer as a whole.  But lesser geology would still have some room at these prices given the excellent results. It is also interesting because I used results going back to 2011. This would also skew results to the downside.

In summary, there has been much said about how good the Permian is. This seems to be correct as well economics are much better than in the Bakken and Eagle Ford core. This is the main reason we like operators like Pioneer, RSP Permian (RSPP), Diamondback (FANG), Concho (CXO), Cimarex (XEC), and Parsely (PE). Not only can these operators turn a profit at lower prices, the inventories are huge. There are multiple intervals that have not been tested as these players continue to work the Wolfcamp and Spraberry. The key seems to be decline rates as all of the Permian is showing an advantage. We continue to think these areas will outperform as well design improves and more de-risking takes place.