We are pleased to report that in 2016, Pioneer delivered one of the best years in terms of performance in our 20-year history. Despite another year of an oversupplied global oil market, which resulted in continued downward pressure on oil prices, the Company’s focus on streamlining operations, improving capital efficiency and maintaining a strong balance sheet allowed us to meet or exceed all of our financial and operating goals. The key drivers of this strong performance were the continued success of Pioneer’s horizontal drilling program in the world-class Spraberry/Wolfcamp shale play in the Permian Basin of West Texas and the outstanding efforts of our employees.
Pioneer’s stock continued to be a leader in the energy sector during 2016 — we were the second best performing stock in our 12-company E&P peer group and the 27th best performing stock in the S&P 500. Over the past five years, our stock was again the second best performer in our 12-company peer group and in the top third of all S&P 500 companies. Total production grew by 15% during 2016 compared to 2015. Oil production increased by 27% over this same period and represented 57% of our total 2016 production. We added proved reserves totaling 205 million barrels oil equivalent (MMBOE) in 2016 from discoveries, extensions and technical revisions (excluding negativeprice revisions of 58 MMBOE and acquisitions of 4 MMBOE), replacing 232% of full-year 2016 production. These reserves were added at a highly competitive drillbit finding and development cost of $9.59 per barrel oil equivalent (BOE).
The Company reduced production costs per BOE by 29% in 2016 compared to 2015. The decrease was driven by cost reduction initiatives and increasing volumes of low-cost, horizontal Spraberry/Wolfcamp production. Horizontal Spraberry/Wolfcamp oil barrels are among the cheapest to produce in the world at a cost of approximately $4.00 per BOE ($2.00 per BOE operating costs and $2.00 per BOE production taxes).
We also significantly improved our capital efficiency in the Spraberry/Wolfcamp during 2016 by reducing drilling and completion costs and increasing well productivity. Despite utilizing higher-intensity and more expensive fracture stimulations, which combine longer laterals with optimized stage lengths, clusters per stage, fluid volumes and proppant concentrations, we decreased drilling and completion costs per lateral foot by 25% from the beginning of 2015 through the end of 2016. Estimated ultimate recoveries per well continued to increase during this period as a result of utilizing the higher-intensity fracture stimulations.
Pioneer is focused on optimizing the development of the Spraberry/Wolfcamp, which includes ensuring that certain infrastructure and services are available. These infrastructure and service additions include the construction of tank batteries and saltwater disposal facilities for horizontal wells, the build-out of a field-wide water distribution system, optimization of the Company’s sand mine in Brady, Texas, construction of additional field and gas processing facilities and maintaining the Company’s pressure pumping and well services equipment.
In late 2015, the U.S. Congress and President Obama approved legislation to lift the ban on U.S. oil exports. Pioneer was a leading proponent to have the ban lifted. Since mid-2016, after gaining access to the facilities that allow us to physically deliver and store oil for export, we have sold cargoes to customers in Europe, Canada and Asia.
The industry has been operating in a low oil price environment since late 2014, when North American oil prices began declining due to a worldwide oversupply of oil. During the fourth quarter of 2016, members of the Organization of Petroleum Exporting Countries (OPEC) agreed to reduce their output by approximately 1.2 million barrels per day, and certain oil-producing nations outside of OPEC, including Russia, agreed to an additional 600,000-barrel reduction in production. These combined output reductions represent an unprecedented level of cooperation among oil-producing countries, and the announcement of the reductions has resulted in a nominal increase in oil prices. In 2017, the worldwide supply of oil is expected to decline and, as a result, oil prices are expected to gradually increase as the supply reductions are realized and worldwide oil inventory levels decline. Enforcement of the agreed production cuts will be monitored closely, and we expect ongoing oil price volatility as compliance with the output reduction agreement is reported and worldwide inventory levels change.
As we enter 2017, we are well positioned in this environment to drill high-return wells, grow production and bring forward the inherent net asset value associated with our world-class Spraberry/Wolfcamp asset. We are forecasting production growth in 2017 ranging from 15% to 18% compared to 2016. Spraberry/Wolfcamp production growth is expected to be the primary contributor, with growth ranging from 30% to 34% in 2017 compared to 2016. We are expecting internal rates of return for the 2017 drilling program ranging from 50% to 100%, assuming an oil price of $55.00 per barrel and a gas price of $3.00 per thousand cubic feet (MCF). We are planning capital expenditures for 2017 of $2.8 billion, which includes $2.5 billion for drilling and completion activities and $275 million for water infrastructure, vertical integration and field facilities.
In the Eagle Ford Shale, we are planning a limited drilling program to test horizontal wells with longer lateral lengths and higher-intensity fracture stimulations. Initiatives to control costs and maximize production will continue in the Raton and West Panhandle areas.
We are well positioned in this environment to drill high-return wells.
Pioneer continues to maintain one of the best balance sheets in the industry. We had $3 billion of cash on hand (including liquid investments) at the end of 2016, with net debt to 2016 operating cash flow of 0.2 times and net debt to book capitalization of 2%. We protected 2016 cash flow and margins through attractive oil and gas derivatives positions that provided incremental cash receipts of $680 million. We continued to be rated investment grade by Moody’s, S&P and Fitch in a year that saw many of the Company’s peers be downgraded below investment grade due to weak credit metrics.
The 2017 capital program of $2.8 billion will be funded from forecasted cash flow of $2.2 billion and cash on hand. Derivative positions are in place that are expected to cover approximately 85% of 2017 oil production and 55% of 2017 gas production. Net debt to 2017 operating cash flow is expected to remain below 1.0 times.
Early this year, we established a long-term goal to grow production organically from 234 thousand barrels oil equivalent (MBOEPD) in 2016 to approximately 1 MMBOEPD in 2026. We expect to achieve this vision by continuing to drill high-return wells that will deliver organic compound annual production growth of 15%+ and compound annual cash flow growth of approximately 20% over the 10-year period. This again assumes an oil price of $55.00 per barrel and a gas price of $3.00 per MCF. In addition, we expect to maintain our net debt to operating cash flow ratio below 1.0 times and improve corporate returns. We also expect to spend within cash flow beginning in 2018 and generate free cash flow thereafter. Capital efficiency improvements are expected to continue and be driven in large part by innovation and technology gains.
By continuing to focus on creating an incident- and injury-free workplace during 2016, we were able to continue to reduce our OSHA recordable incidents. Our upstream operations had zero employee lost-time incidents. We also developed and implemented a contractor safety program company-wide.
Pioneer dedicates substantial resources to ensuring our operations are performed in a manner that protects the environment. During 2016, this effort included completing voluntary leak detection and repair surveys across all production sites, reducing our reportable spills and reducing average overall spill volumes. The Company also signed an agreement with the City of Midland to upgrade the City’s wastewater treatment plant in return for two billion barrels of low-cost, non-potable water over a 28-year period to support our completion operations. We regularly enhance corporate sustainability reporting on Pioneer’s website.
We expect further improvements in 2017. Areas of continuing focus this year will be driving safety, contractor safety and methane emissions reductions.
Having great assets isn’t enough. We have to execute day in and day out. This would not happen without the commitment to excellence that is displayed by all of our people. We are building a diverse and inclusive workforce of team players with strong technical skills and a focus on success. In 2016, we were named the best place to work among large companies in the Dallas/Fort Worth area based on a survey of our employees conducted by The Dallas Morning News. This is the seventh year in a row that Pioneer has been ranked in the top three.
We want to personally express our appreciation to each and every person who works at Pioneer for the tremendous contributions they made to our continuing strong performance in 2016. Our employees also give back in meaningful ways to the communities where they work and live by volunteering their personal time and resources.
In closing, we have successfully managed through two years of low commodity prices by diligently focusing on reducing costs, improving well productivity and maintaining a strong balance sheet. We are now well positioned to grow and improve corporate returns as we come out of the downturn.
Sincerely, Scott D. Sheffield
Executive Chairman of the Board
& Timothy L. Dove
President and Chief Executive Officer
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