Pioneer sells Wolfcamp Shale stake to Sinochem affiliate

Dallas oil and gas explorer Pioneer Natural Resources Co. said Wednesday it agreed to sell 40% of its 207,000 net acres in West Texas' Wolfcamp Shale play to Sinochem Petroleum USA LLC, a unit of China's Sinochem Group, for $1.7 billion, way above analysts' projections.

The price includes a $500 million cash payment and $1.2 billion for part of Pioneer's share of drilling and facilities cost over six years.

In a separate statement, Pioneer said it's taking its Barnett properties off the market after receiving weak bids. RBC Richardson Barr Securities Inc.'s Scott Richardson advised Pioneer on that sale process, which began in September and included 155,000 gross acres, two-thirds of which are in the "liquids-rich" Barnett Shale Combo play. The properties produced 9,000 barrels oil equivalent per day in the fourth quarter with one rig. Pioneer said it plans to reclassify the assets back to continuing operations as of the fourth quarter of 2012.

Simmons & Co. International wrote in a report that the Sinochem deal is "positive news" for Pioneer, as it works out to around $20,500 per acre undiscounted and $16,560 per acre discounted, both of which are much higher than investor expectations of $10,000 to $15,000 per acre.

"This cash is instrumental in meeting the company's funding gap for their '13 capital budget," the report said.

Simmons called the termination of the Barnett sale "negative," as investors were expecting it to bring in $300 million, but the additional $400 million from the Wolfcamp sale more than makes up for it and allows Pioneer to aggressively "push the drill bit" on its Wolfcamp acreage.

Global Hunter Securities LLC said in a note that the deal represents a $18,100 per acre price, $3,000 per acre above Wall Street expectations, and agreed that the no-go on the Barnett divestiture, which it estimated at $450 million, is a "nonevent" in light of the strong joint venture metrics with Sinochem.

The Wolfcamp play is in the southern portion of the Spraberry Trend Area Field and is plumbed using horizontal drilling techniques. Other large oil and gas companies are working there, including Devon Energy Corp., Sumitomo Corp., ConocoPhillips Co. and Chevron Corp. as well as smaller players, including Approach Resources Inc., Berry Petroleum Co., Riverstone/Carlyle Global Energy and Power Fund IV LP-backed Three Rivers Operating Co. and Post Oak Energy Capital LP-backed Crown Oil Partners IV LP. Other companies in the area include Callon Petroleum Co., EOG Resources Inc., Laredo Petroleum Holdings Inc., Linn Energy LLC and Legacy Reserves LP.

The transaction is expected to close in the second quarter if it clears governmental approvals.

Sinochem will acquire 82,800 net acres of leasehold held by Pioneer for all Wolfcamp depths and deeper horizons. Pioneer is keeping 60% of its interest in the Wolfcamp depths and deeper horizons, with Sinochem receiving 40% of Pioneer's interest. Pioneer will continue as operator and conduct leasing, drilling, completion, operations and marketing activities in the joint interest area, which covers portions of Upton, Reagan, Irion, Crockett and Tom Green Counties. Pioneer is also keeping its working interests in all horizons shallower than the Wolfcamp horizon.

Pioneer and Sinochem plan to drill 86 horizontal Wolfcamp Shale wells this year, bumping up to 120 wells in 2014 and 165 wells in 2015.

If Sinochem participates in any vertical wells that are drilled in the joint interest area after the effective date, it will get its share of production and costs from the Wolfcamp and deeper horizons based on the anticipated reserve contribution from the Wolfcamp and deeper intervals relative to anticipated reserves from all completed intervals. Pioneer's and Sinochem's participation in vertical wells will be based on each party's interest without any drilling carry being applied and Pioneer will keep 100% of its vertical production in the joint interest area.

Pioneer said it's successfully drilled and completed 39 horizontal wells in the Wolfcamp Shale joint interest area by the end of last year, 22 of which were "on production" and 4 of which were "flowing back."

Pioneer CEO Scott Sheffield said the accelerated development with Sinochem will add significant production and reserves for Pioneer and enhance shareholder value as well as reduce the U.S.'s dependence on foreign oil imports, create thousands of new jobs, stimulate the Permian Basin economy and add tax revenues for local communities, schools, the state and the country.

The announcements brought personnel changes at Pioneer as well. William Hannes, formerly executive vice president of South Texas operations, will hold the same title of the newly formed Southern Wolfcamp Asset Team, which will focus on executing the drilling program in the horizontal Wolfcamp Shale joint interest area. Danny Kellum, executive vice president of Permian operations, will focus on Pioneer's remaining Permian activities, with executive responsibility for the Permian asset team and Permian integrated services. Jay Still, executive vice president of domestic operations, will add executive responsibility for Pioneer's South Texas operations to his responsibilities for Pioneer's Mid-Continent, Rockies, Alaska and Barnett Shale assets.

Pioneer was advised on the deal by Bank of America Merrill Lynch's Oscar Brown, Andrew Castaldo and Steve Almrud and Vinson & Elkins LLP's David Cohen, Marcia Backus, Shay Kuperman, Chris Dawe, Billy Vigdor, Tom Crichton, Todd Way, John Grand, Michael Allers, Mingda Zhao, Alan Alexander, Scott Fulford and Elizabeth Bellows.

Sinochem received assistance from Tudor, Pickering, Holt & Co. Securities Inc.'s Maynard Holt, Lance Gilliland, Ward Polzin and Jeff Knupp.

Sinochem received legal advice from Mayer Brown LLP, including Kevin Shaw, Bill Moss, Pablo Ferrante, Andrew J. Stanger, Jeff Dobbs, Jon Scott, Gabriel Salinas and Robin Clarkson.