Chairman's Message
Another Stellar Year
Fellow shareholders,
I am pleased to report that 2011 was another truly stellar year for Pioneer. Our portfolio of oil and liquids-rich assets in Texas, aggressive drilling program and integrated services model was again a winning combination. We broke the records that the Company set in 2010, reporting earnings of $834 million, or $6.88 per diluted share, and cash flow from operations of $1.5 billion. Production from continuing operations grew 16% compared to 2010. Oil prices continued to rise during 2011, further enhancing the returns on investment for our oil and liquids-rich drilling programs in the Spraberry field in the Permian Basin of West Texas, the Eagle Ford Shale in South Texas and the Barnett Shale Combo play in North Texas. The Spraberry field, including the underlying Wolfcamp formation, and the Eagle Ford Shale are the two most active plays in the U.S., with the industry operating more than 200 rigs in each area.
The Permian Basin has been a rich source of hydrocarbons since oil was first discovered there in1923. As a result of strong oil prices and improved fracture stimulation technology, what were previously viewed as marginal and unrecoverable oil reserves are receiving renewed interest. Pioneer has long been the largest and most active operator in the Spraberry field and significantly accelerated drilling when oil prices strengthened in 2010. During 2011, Pioneer further expanded its activity by drilling 690 vertical wells in the Spraberry field and increased its net daily production from the field by 33%. Vertical wells were completed in the Spraberry formation as well as in additional shale and silt pay zones, and most were drilled deeper to access additional reserves from the Wolfcamp, Strawn, Atoka and Mississippian intervals.
As we reported last year, in vertical wells that include the additional shale and silt pay zones and the deeper Wolfcamp formation, average production generally exceeds that of a typical Spraberry-only well by approximately 30%. In the 246 wells that Pioneer drilled into the deeper Strawn interval during 2011, average production rose another 25%. Fewer wells were drilled into the Atoka and Mississippian intervals, but adding these intervals also materially enhanced production and recoverable reserves. The Wolfcamp interval underlies the Spraberry interval in essentially all of Pioneer's approximately 900,000 gross acres under lease in the Permian Basin, much of which is also prospective for the Strawn, Atoka and Mississippian intervals.
Late in 2011, Pioneer initiated horizontal drilling in the Wolfcamp formation in the Spraberry field, completing two wells with very encouraging early results. These wells included 5,800-foot laterals and 30+ stage hydraulic fracture stimulations, and early production has been seven times that of a vertical Spraberry well. Pioneer holds leases covering more than 400,000 acres that could be prospective for horizontal Wolfcamp drilling, and the Company is currently acquiring 260 square miles of 3-D seismic data to further delineate horizontal drilling plans for this acreage.
In the Eagle Ford Shale field, Pioneer executed an aggressive growth program in 2011, drilling 111 horizontal wells and growing the Company's share of daily production to 20,000 barrels oil equivalent (BOE) per day during the fourth quarter. Our drilling program is focused on the area of the play that holds oil and natural gas liquids which are priced in relation to oil prices and at a significant premium to dry natural gas. Through our joint venture with Reliance Industries, we significantly increased our drilling program, running 12 rigs by mid-year, and completed construction of essential central gathering facilities and other infrastructure during 2011.
Pioneer drilled 44 wells in what is known as the Barnett Shale Combo play, a section of the Barnett Shale that holds oil, natural gas liquids and natural gas. We have built a position of almost 80,000 net acres, which represents more than 1,000 drilling locations, and operated two rigs in the play for much of 2011.
Pioneer's operations on the North Slope of Alaska progressed during the year with a focus on oil production operations and continued development drilling.
We invested $2 billion in drilling during 2011, and each of our asset teams played an important role in providing the cash flow to support our growth initiatives. Our Rockies, Mid-Continent and South Texas Edwards Trend areas produce predominantly dry natural gas, and considering the outlook for low natural gas prices, maximizing revenue and minimizing costs in these areas is especially important. Our success in 2011 was driven by strong execution across all operations and corporate functions, and our employees got the job done while respecting the health, safety and general well-being of others and the environment.
I am particularly proud of the progress we've made in evaluating and testing technologies for reducing our use of fresh water and in measuring, reporting and reducing other environmental impacts. We expanded our fleet of lower-emission natural gas vehicles, participated in industry efforts to establish a system for disclosing the components of hydraulic fracturing fluids, joined other companies in collaborative efforts to reduce water consumption and participated in a number of initiatives aimed at better educating and informing the public about our industry and the safety of our operating practices.
Our integrated services model provided tremendous cost savings during 2011 and gave us access to critical equipment and services that were essential to meeting our aggressive growth goals. Under this model, which we expanded during 2011, we own and operate many of our own services, including fracture stimulation, drilling and well servicing.
During 2011, we drilled 904 wells while also reducing debt. Standard and Poor's (S&P) recently upgraded Pioneer's corporate debt rating to investment grade. Pioneer's proved reserve additions totaled 124 million BOE during 2011, reflecting our strong drilling results and strong oil prices offset by the impact of negative gas price revisions. Despite the reduction related to low natural gas prices, we replaced 256% of 2011 production at an all-in finding and development cost of $17.51 per BOE.
Stock price performance during 2011 was significantly constrained by a 30% drop in the price of natural gas over the course of the year. While the average stock prices for Pioneer's peer group dropped 17% during the year, Pioneer's stock price rose 3%, reflecting our strong operating results and liquids-weighted asset portfolio. For the three-year period covering 2009 through 2011, Pioneer was the top performing energy stock and the fourth best overall performer in the S&P 500.
Continuing Liquids-Rich Focus for 2012
With substantial assets in four of the primary oil and liquids-rich plays in Texas, we expect to deliver strong production growth again in 2012. We are expanding activities in the Permian Basin to include an active horizontal Wolfcamp drilling program and plan to actively continue our Spraberry, Eagle Ford Shale and Barnett Shale Combo drilling programs. The capital program for drilling for 2012 is expected to total $2.4 billion, with 89% of the spending allocated to drilling and infrastructure in these four areas. We also expect to spend approximately $400 million to expand our integrated services to control drilling costs and support the execution of our drilling programs.
We plan to drill approximately 750 vertical wells in the Spraberry field, completing roughly 50% of these wells in the underlying Wolfcamp interval and taking the remaining 50% even deeper into the Strawn, Atoka or Mississippian intervals. Approximately 50 of these wells will be on locations downspaced from 40 acres to 20 acres. For the 34 wells Pioneer drilled on 20-acre locations over the past two years, production performance approximates the type curve for a 40-acre well.
Pioneer has recently increased its rig count in the horizontal Wolfcamp play from one to three rigs, and we plan an additional increase to seven rigs by the end of this year. Two wells are currently being drilled in southern Reagan County and a third in southern Upton County. All three wells will be testing longer laterals and additional fracture stimulation stages.
In the Eagle Ford Shale, Pioneer plans to run 12 rigs and drill approximately 125 horizontal wells, primarily in the liquids-rich area of the play. Production is expected to double in 2012, and we continue to work to control costs, further reduce drilling times and optimize completion techniques. To reduce costs, we are testing the use of lower-cost proppant for fracture stimulation with good results to date. Build out of our midstream facilities continues, and we have added agreements for third-party processing and transportation of our growing production.
Pioneer's production from the Barnett Shale is expected to approximately double during 2012 as we continue to run two rigs in the Combo play. Production there is comprised of 60% oil and natural gas liquids and 40% dry natural gas.
On the North Slope of Alaska, Pioneer continues to drill development wells from our island facility, and we have contracted a second rig to drill two exploration wells that cannot be reached from the island during the current winter drilling season.
We will continue to rely on our long-lived natural gas assets in the Rockies, Mid-Continent and Edwards Trend, with their steady production and slow declines, to provide essential cash flow.
In February, we announced plans to sell our assets in South Africa, completely exiting international operations.
As we look forward to another exciting year, I want to commend Pioneer employees for consistently demonstrating our commitment to strong corporate values and for their dedication to Pioneer's continued success. Employees again honored Pioneer by voting the Company a top place to work, and they positively impacted their communities by generously giving of their time and financial resources, many times in joint effort with Pioneer.
In 2012, we will continue to build on the strength of dominant operations in four of the best oil and liquids-rich plays in Texas and expect yet another year of stellar results. As always, I appreciate your support.
Scott D. Sheffield
Chairman and CEO
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