CERAWeek: Permian persistence, no debt keys to Sheffields' success

March 20, 2017
Lessons passed down from Permian pioneer Joe M. Parsley to his son-in-law Scott Sheffield and then to Scott's son Bryan Sheffield hold true for any US onshore operator outside of their lineage.

Matt Zborowski
Assistant Editor

Lessons passed down from Permian pioneer Joe M. Parsley to his son-in-law Scott Sheffield and then to Scott's son Bryan Sheffield hold true for any US onshore operator outside of their lineage.

A strict focus on a basin that brought the family success, a devotion to capital discipline, and continued innovation-namely though horizontal drilling-has ensured the father-son executive duo success in their respective careers even through industry downturns.

"Wall Street hated the Permian basin for 30 years" because it was seen as boring with no upside, recalled Scott Sheffield, Pioneer Natural Resources Co. executive chairman and the firm's chief executive officer from August 1997 through December 2016, during a Permian plenary session at CERAWeek by IHS Markit in Houston on Mar. 7.

He noted Time Magazine in the 1950s said the Spraberry was the most uneconomical oil field in the world, and now, as one of the world's largest oil fields, firms are flocking to it. Pioneer has a 785,000-acre position in Spraberry, which was built over decades through property acquisitions, mergers, and exploratory efforts.

Pioneer drilled its first Permian shale well in 2009 and had its "ah-ha" moment in 2011 when its geoscientists said it had more than 10 billion bbl underneath its acreage in the Midland basin, Scott said. Pioneer then "went on a buying spree" for deep rights for around $200-400/acre.

In 2017, the firm is planning to operate 18 horizontal rigs in the Spraberry-Wolfcamp. Production costs for Pioneer's horizontal Spraberry-Wolfcamp wells are expected to range $4-5/boe. The firm's forecasted 2017 production growth rate for the Spraberry-Wolfcamp ranges 30-34% with oil production increasing 33-37%.

Lessons in debt management

Bryan Sheffield, Parsley Energy Inc. founder, chairman, and chief executive officer, has overseen his firm, growth from a two-person startup in 2008 to a major acreage holder in the white-hot Permian Midland and Delaware basins despite the plunge in crude oil prices beginning in summer 2014.

Bryan's Permian success story, however, has come with his own growing pains against the better advice of his father, namely in the form of debt, the accumulation of which sank less fortunate companies during the downturn.

"I maxed out my first lien in the Midland banks and went to Houston and borrowed from Chambers Energy [Capital]," a Houston-based investment firm, Bryan said. "I did two mezzanine deals, a second lien, and I also did a term loan, which is a second lien." Bryan said his father also specifically warned him against soliciting money from private equity "because they're going to control you."

Parsley then found three private equity groups that were willing to do a minority investment with no negative controls. The firm's initial public offering came in May 2014, which eliminated all of its debt, $930 million, in one fell swoop.

After making more than $1 billion in deals for Permian assets last year, Parsley has kicked off 2017 by spending about $3.5 billion to continue its expansion in the basin. The firm in February agreed to acquire undeveloped acreage and producing properties in the Midland basin from recently formed Double Eagle Energy Permian LLC for $2.8 billion (OGJ Online, Feb. 9, 2017).

After its latest purchase closes, Parsley will have 227,000 net leasehold acres in the Permian with 179,000 in the Midland.

Scott boasted that Pioneer is a $34-billion company with zero debt. He explained that "you never know when prices are going to collapse-you can't predict these downturns." With the countless bankruptcies suffered in the industry over the last couple of years, "I think people are going to run a lot tighter ship over the next several years because of this last downturn," he predicted.

"Everybody should think that there's going to be a downturn around the corner," Scott said. "Always be prepared."

Permian acreage, services costs

Bryan doesn't believe there's a price-per-acre bubble in the Permian as a result of the numerous deals that have taken place in the region over the past year. "What's amazing is, between $40 and $50 oil, we're seeing the same exact price per acre" as at about $100/bbl because "service costs are basically cut in half and we're more efficient."

He said there's "a sand mine frenzy" in West Texas right now that he's content letting play out. "The way I look at services companies right now is they basically raise their prices to finally break even instead of losing money." He thinks that if oil rises above $60/bbl, however, "we're going to have some problems in tight supply for particular items."

Scott noted, "We have 12-16 benches in the Permian. If the services companies can figure out how to drill 6 or 8 at one time and frac them all at once, it'll take the Permian to another level you won't believe. Instead of growing 500,000 b/d/year, you could easily grow 1 million b/d/year."

Bryan is less worried about takeaway capacity, meanwhile, noting there's been drilling in the Permian since the 1940s along with a lot of existing infrastructure.

"We're being approached by private equity-backed midstream companies around the clock in the Delaware and the Midland basin [that are] wanting to build these pipelines," Bryan said. And some of private equity-backed companies are considering more lines connecting the Midland and Delaware basins with the Gulf of Mexico.

Scott anticipates that if basin output reaches 8-10 million b/d, "we're going to need a new pipeline, 100,000 b/d, every year for 10 years. We're going to need NGL lines to [Mont] Belvieu to the fractionators. We're going to need natural gas lines to Mexico. We've got to keep a great relationship with Mexico. We cannot overturn [the North American Free Trade Agreement] too [badly]."