Pioneer Natural Resources Co. (PXD) Thursday revealed a joint venture agreement with a wholly-owned U.S. subsidiary of India-based Reliance Industries Limited to sell a 45% interest in around 212,000 net acres leased by Pioneer in the Eagle Ford Shale play for $1.15 billion.
Reliance will pay $266 million in cash to Pioneer at closing and will pay $879 million to carry Pioneer's future drilling costs. Additionally, Reliance will partner with Pioneer in developing midstream assets in the Eagle Ford Shale as a 49.9% partner.
Reliance will acquire 95,300 net acres of leasehold held by Pioneer. Pioneer will retain an average 42% working interest in the acreage and Reliance will receive an average 41% working interest. Other working interest owners will continue to hold the remaining 17% working interest. Pioneer will continue as operator.
Reliance, led by Mukesh Ambani, has also entered into a joint venture agreement with Newpek LLC, Pioneer's existing partner in the Eagle Ford Shale play, for total consideration of around $210 million.
Closing of the deal is expected within five business days. The joint venture agreement is effective June 1.
Reliance has the right to perform certain drilling and completion operations beginning in 2011. Apart from funding its own drilling obligations, Reliance has agreed to fund 75% of Pioneer's portion of drilling costs until the $879 million of drilling carry is fully utilized. Pioneer has six years to utilize the drilling carry, subject to extension under certain circumstances.
Shale gas is becoming an increasingly more important source of natural gas, and reports suggest that by 2020 around half of the natural gas production in North America will be from shale. It is also believed that increased shale gas development will help reduce greenhouse gas emissions.
Gas producers in North America are trying to increase their production from shale formations, and Reliance is also focusing on building a formidable position in the U.S. shale gas business. Couple of months ago, Reliance bought an interest in Atlas Energy, Inc.'s (ATLS) Marcellus Shale position for $1.7 billion.
Pioneer and Reliance have agreed to a joint venture development plan. The plan forecasts the drilling of 26 horizontal Eagle Ford Shale wells between June and December this year, which will increase to 70 wells in 2011, 120 wells in 2012 and 140 wells in 2013.
Pioneer has completed six horizontal wells in the Eagle Ford Shale. Five of these are on production at a combined rate of 28 million cubic feet equivalent per day and the sixth is expected to be brought online late in the third quarter.
Pioneer is purchasing a new fracture stimulation fleet to support the joint venture's drilling ramp-up. This new fleet is expected to be operational by the second quarter of next year.
According to Pioneer, the joint venture will benefit from the technological advantage it has in the Eagle Ford Shale. The company has over 2,000 square miles of 3-D seismic data, logs from more than 150 operated wells, proprietary core samples and micro-seismic results. Around 1,750 drilling locations have been identified over the existing joint venture acreage position with a gross resource potential of more than 11 trillion cubic feet equivalent.
Pioneer and Reliance expect to continue to grow the joint venture's Eagle Ford Shale leasehold position within an area of mutual interest, which includes Atascosa, Bee, DeWitt, Karnes, Live Oak and McMullen in Texas.
Pioneer will act as the sole leasing agent for the joint venture in the area of mutual interest. Reliance will also have the option to acquire a 45% interest in Pioneer's share of such new acreage under comparable terms to those agreed to by Pioneer with the leasehold owner. The joint venture will own about 9,500 net acres within the area of mutual interest that have recently been acquired by Pioneer.
Pioneer and Reliance will also develop a midstream business which will initially consist of central gathering facilities to separate condensate production from produced gas and to treat the produced gas. Pioneer's 50.1% capital requirement associated with the construction of these facilities through 2013 is estimated to total around $275 million, with much of this capital expected to be spent by the end of next year.
Pioneer believes that developing this midstream business, instead of contracting with a third-party, will provide enhanced control and efficiencies for the marketing of the joint venture's upstream production and the potential to attract third party business.
Based on the joint venture development plan, Pioneer's net production in the Eagle Ford Shale is expected to increase from an average of 2,000 barrels oil equivalent per day, or BOEPD, in 2010 to a range of 32,000 BOEPD to 41,000 BOEPD in 2013.
Assuming current NYMEX strip prices for oil and gas, this production growth, coupled with the up-front cash payment and drilling carry from Reliance, is expected to generate positive cash flow for Pioneer from its Eagle Ford Shale upstream and midstream activities in all years ahead.
Pioneer had previously anticipated total company production growth of over 10% per year during 2011-2013, while continuing its commitment to spend within cash flow. This growth forecast was primarily due to its drilling ramp up in the Spraberry field. With the addition of the ramp up in Eagle Ford Shale drilling, the company now expects production growth more than 15% per year over this same period, while still spending within cash flow.
Considering the company's oil and gas derivatives for 2010 through 2013 and assuming current NYMEX strip prices, cash flow is now projected to increase to $2.0 billion in 2013 from $1.2 billion in 2010.
Commenting on the deal, Scott Sheffield, Chairman and CEO of Pioneer, said, "We are very excited to partner with Reliance, a global energy industry leader, and pleased that they share our confidence in the development potential of Pioneer's large, liquids-rich acreage position in the Eagle Ford Shale. Our joint development plan will add significant production and reserves for Pioneer while enhancing shareholder value."
Pioneer last month reported a profit for the first quarter, compared to a loss last year. The company's net income attributable to stockholders for the first quarter was $245.25 million or $2.08 per share, compared to a loss of $14.61 million or $0.13 per share last year. Revenues and other income increased to $817.43 million from last year's $477.88 million.
PXD closed Wednesday's regular trade at $67.19, up $0.22 or 0.33%, on 1.94 million shares.
Reliance shares are currently trading higher by 0.37% on the Bombay Stock Exchange at Rs 1,062.55.
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