Highlights from Pioneer and Apache conference calls last week

I skimmed the transcripts and there were a number of interesting bits.  The main takeaways were

1. These guys are doing BIG capex reductions, which I think is an appropriate move.
2. The current price environment certainly does not pose an existential risk to the North American focused large-cap E&Ps
3. They are slowing down drilling waiting for service costs to come down, and not just waiting for oil prices to go up.  They might ramp drilling back up if they can get the anticipated price reductions for services, especially related to pressure pumping.

APACHE:

• Massive capex cuts were announced.  Apache is going from 91 rigs in Q3 2014 down to 27 rigs.  They are guiding to flat production.
• $3.8b 2015 capex guidance is a 60% cut vs 2014.
• Wells that cost $8mm each in 2014, they were projecting $7mm for 2015.  Now they say maybe down to $6mm with anticipated service cost declines.  And there are plenty of wells that can deliver “solid economics” at the current strip price.
•  What they are waiting for is not necessarily a rise in oil prices, but rather a decline in service costs, which will make drilling more economic.  They are even deferring completions to wait for price declines in services.  They anticipate turning more rigs on at the end of the year, EVEN IF THE PRICE STAYS FLAT AT CURRENT LEVELS.
• 20% service cost declines they think is quite a conservative number.

Apache has not been a well run company.  I owned it for a while through September of last year because of the very low valuation, not because of any particular confidence in management. 

They also had “pro forma growth” of 12% yoy at 609 mboed.  This is always funny that someone can use the word “growth” with a straight face when their production actually declined by about 20%.  Apache sold stakes in over-budget LNG projects in Australia for $2.75b (pending).  They continue to spend money on this, which they will be reimbursed for at closing, for an additional $1b.  They sold stakes in Lucious and Heidleberg projects in deepwater Gulf of Mexico for $1.4b in announced in June.  They sold western Canada Assets for $375mm in March.  They sold their stake in Argentina to YPF announced in March as well for $850mm.  They end with $10.5b in net debt.  A year prior they had about 7.6b of net debt.  So assuming they get the $3.75b cash for the LNG projects (the extra $1b is for capex incurred since the deal was signed), which are not contributing to production, their net debt has declined slightly and their production has declined from 761mboed per day at year end 2013 down to 609 mboed at year end 2014.  They have returned cash to shareholders with the dividend and share buybacks.  401mm shares outsanding in YE 2013, and 24 million were bought back over the course of the year ($150mm at $60 per share).  $100mm was also spent on dividends.  All told though, Apache has not made good investment decisions.  We have seen net debt fall slightly (maybe $500mm) as production falls dramatically, even in a year of generally high oil prices.

I must say though, that I approve the massive capex cut strategy and it is certainly good news is they are not talking about selling their cash cow Egypt assets, which some have urged.  

PIONEER

• Full year 2014 production was up 18% yoy to 182 mboed.   Currently production is at 201 mboed for q4.  Oil production grew at 25%.  Projecting average 2015 production to be up 10% on 2014, but with qoq declines near the end of they year.
• 2015 capex guidance of 1.85b, 45% below 2014.
• Reducing rig count 50% to 16 rigs in Spraberry (Permian basin) and Eagleford.  They are shutting down all vertical rigs.
• Assuming $9mm for a 9,000 ft horizontal well in the wolfcamp for 2015, but he says that is quite conservative and it might end up being lower.  This would give them 55% irrs at the strip pricing.  This is benefiting from a 20% service cost reduction plus improving well performance.
• They say they can get similar returns at $70 as they were getting at $90 if the anticipated cost reductions come through.

I think they are taking the correct actions in the current environment.  I still think they are overvalued with a $23b market cap.