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Pioneer Natural Resources Company (NYSE:PXD) Goldman Sachs Global Energy and Clean Technology Conference January 5, 2023 8:00 AM ET

Company Participants

Scott Sheffield - Chief Executive Officer

Conference Call Participants

Neil Mehta - Goldman Sachs

Neil Mehta

It's a great honor to have Scott Sheffield from Pioneer. Scott, thank you so much for being here down to Miami.

Scott Sheffield

Thank you, Neil. It's good to be back, I guess it's been since 2019.

Neil Mehta

Yes. Pre-COVID. And so, it's great to have you here and to share your perspective on the outlook for the shale, but particularly the focus on the Permian. Scott, I know you're going to walk us through a couple of slides here and we're going to then jump in to Q&A. So, we're going to turn the floor over to you, sir.

Scott Sheffield

Thank you. Good morning. Obviously, two of my favorite speakers before. It's hard to follow Jeff. I think he's been really one of the best predictors of oil prices since COVID hit. Up until recently, who would have predicted SPR, who would have predicted zero COVID policy and who would have predicted a recession? Maybe one for that, I'm a firm believer in what he's saying is going to happen. And I'll add some fuel to the fire of what's going to happen?

Let me advance the slides. The first slide, you all have seen something similar. So I picked a few slides over the Christmas and New Year break, I thought, are interesting. This is reserve replacement, which nobody looks at anymore. We never get asked the question, Neil, about reserve replacement anymore. But it's very, very important to what happens to this industry. This goes all the way back to 1933.

And so, you can see it's divided up between the majors and the independents. And you can see what's happening now. It happened back in the early 80s with the collapse of oil prices, and it's happening now. The majors are way below 100%. The independents are now down to about 100% reserve replacement.

So that's setting up for a lot of things to happen over the next seven years in regard to whether it's higher oil prices or whether it's, to a lot greater extent, to great M&A activity over the next seven years.

Next slide. Again, you've heard this number, we don't have it on here, but it's – you add it all up, we're spending over a trillion dollars less than what I'll call the previous cycle. That's 2010 to 2014. So since 2015, the industry worldwide is spending over a trillion dollars less in investment.

This slide, I found going back in 1986, this is essentially oil demand on a linear trend. And you can see the effect of what happened with COVID. All it takes, as Jeff was saying earlier, is for China to get back, which is going to happen sometime by the end of 2023 and we're going back on that relationship. I think it's already been stated. There's only a couple of countries left in the world that have the extra supply. And you can see past recessions hadn't really affected oil demand. It always comes back to this relationship.

This is an interesting slide from RBC put out over the last two weeks. Since I've been around a long time, even back before this, and looking at oil prices and oil price predictors. This is the oil price, WTI. And those lines that are going forward is the foreword strip as of January 1 of that year. And you can see, obviously, we all know that the futures curve, we all try to run our business off of it. We all test it lower cases, we run higher cases. But you can see the prediction ability is terrible.

And what's amazing now is that we're probably in a more extreme backward dated than I've ever seen. So Brent today is $80. It averages $75 over the next – $73 to $75 over the next five years. It gets down to $67 in about five to six years. WTI is obviously in that $3 to $5 range less in that. So, we can't really use the strip.

But in regard to a lot of people I've talked to, I'm a firm believer that strip is going to stay in backwardation. What Saudi wants is a higher price, whether it's $90 or $100 or higher. They want the strip to stay in backwardation. There's no liquidity in the markets. Banks aren't hedging. There's no body that's using the product that's hedging anymore. No airlines are hedging. So there's nothing to bring the strip up in my opinion. So I'm a firm believer, if oil goes to $150, the strip is going to be backward dated to $100 or $90, definitely over the next several years. So, this is definitely what's going to happen. And you just can't use the strip in regard to what the future price of oil is.

Now, this is the futures curve as of mid-December, and this is you all's prediction, Neil. I don't know if it's yours or Jeff's or what, but I'm definitely a firm believer. I think we're setting ourselves up. As Jeff has told me over the last two or three years for another – if you go back to this curve, you can see there are certain events in the world over the last 30 years that resets the oil price. So, I'm definitely thinking we're resetting into a base of about $90, with upside up to about $150 between now and 2030 is my firm belief.

This is Goldman versus the Brent futures curve, who's going to be right? I think Goldman is going to be closer than the futures curve. You can't use SPR that much more. We're already at a 40 year low on SPR for political reasons. The recession historically has not affected oil demand that much. And then we all know China's going to come back and come back strong.

Couple quick slides on Pioneer and then I'll stop. Obviously, Pioneer has probably the largest contiguous acreage position in the Permian Basin. We definitely are focused on high returns. We bought greater returns and simply said, Rich and myself and a couple other executives got more involved in picking every location over the next several years. So with our staff, our top job is capital allocation, improving capital efficiency, and we have over 25,000 locations. Some of the exciting things you will see over the next few years, there are deeper plays that are being discovered, if you haven't followed. Watch out for the Barnett Woodford over the next several years. It's been tested already, looks very positive. Pioneer has several thousand locations there in that regard and also enhanced oil recovery. We know it works. Whether it's wet gas or whether it's CO2, the Permian is going to be here for a long time.

Then lastly, in summary, Pioneer delivered $7.5 billion to its shareholders, $26 a share. 95% of our free cash flow returned to the investor.

Let me stop there, Neil, and open it up.

Question-and-Answer Session

Q - Neil Mehta

Yeah, that's a great way to set the stage for the conversation. So thank you for that, Scott. Let's start on the micro and talk about the key strategic priorities for the organization in 2023. I think you alluded to it in terms of being more selective in terms of which wells locations that you pursue and prosecute over the course of the next couple of years. Talk about what shifts you're making within the organization.

Scott Sheffield

Yeah. Essentially, what we're doing is just picking the highest. We upped our hurdle rates and pick us the highest return locations. When you have 25,000 locations to pick for, you have an area that's 200 miles north and south, 100 miles east to west. That's simply what we're doing. Our goal is to produce the lowest emissions intensity barrel, and provide it to the world. That's really our key focus, and return most of our free cash flow back to the investor.

Neil Mehta

Yeah. We'll talk a little bit more about the Pioneer specific plan, but the keynotes on the outlook for the Permian. So what is your outlook for the Permian? We're hearing a lot about resource maturity in the basin. We've had an extraordinary 10 year period to get to this point. But how do you think about the growth profile and the next phase of the Permian?

Scott Sheffield

We have the Permian – about a year or two ago, I stated it was going to go to about 8 million barrels a day to 2030. The EIA has it at 5.5 million barrels of oil per day. We have lowered that to about 7 million by 2030. The reason we've lowered it is that people – obviously, the effects of moving to what I call stack development in both the Delaware and also in the Midland basin. And that's combining either the Bone Springs or the Sprayberry, depending on which basin you're in, the shallower formation with the Wolfcamp zones. It's better to drill four wells or six wells, all at the same time to get the best performance. Also, there is a lot of companies that are moving – they're running out of inventory. They are moving to tier two and tier three inventory.

Also, I'll make a point. Chevron made a point recently that there were going to 1.2 million to 1.5 million barrels of oil equivalent per day by 2040. But the first time somebody put out a number that far, there's only three companies in my prediction that will be over 2030 in the Permian Basin over a million barrels of oil equivalent per day, that's Chevron, Conoco and Pioneer. They are the only three that have a inventory that deep, can take it over a million barrels of oil equivalent per day.

Now what's going to happen over time. The gas/oil ratios in the entire Permian Basin will continue to go up. We're seeing that. You'll see the percent oil drop for all those companies, most likely below 50% over the next 10 years. And the gas itself will get up to about 30 BCF. We're going to need a gas pipeline, at least about every 18 months to two years going forward.

Neil Mehta

So the revision from – you said 8.5 million to 7 million, how much of that is a function of gas/oil ratios versus reinvestment rate versus a degradation in productivity?

Scott Sheffield

I think one of the words I wanted to focus on is, as a reservoir engineer my entire life, degrading is probably the wrong term to use that the market is using. So when you combine the true degrading from a reservoir engineering standpoint is when you down space a well and you're robbing barrels from the other well. That is what I call a degrading. So, you're drilling your wells too close. Instead of 800 to 1000 feet, you're drilling at 600 feet. If you're not careful, you're going to be robbing oil from the other. It's going to affect the decline curve of the original offset well. That's true degrading.

By combining Sprayberry, Bone Springs with Wolfcamp and seeing lower productivity is not degrading, in my view. But it's a combination of – some companies are truly degrading. And some companies are just – it's the best way to develop the resource. So it's a combination of both of those, Neil, is what's happening over the next several years and what's happening now.

Neil Mehta

And you see pioneer staying as a pure play Permian story or do you see the need for diversification?

Scott Sheffield

Right now, we are a pure play. We made two acquisitions that doubled the size of the company. Very good acquisitions at the right time in the cycle. There was nobody else there left in the Midland Basin. There was a couple other privates that have been rumored to sell. One is degrading their inventory significantly, and the other one is not for sale. So really, we see no opportunities long term in the Midland Basin for Pioneer.

Neil Mehta

Do you think the Permian will consolidate over time and these independents will end up in the hands of either the majors or merging with each other?

Scott Sheffield

I think because of the some of the slides I showed before in regard to people running out of inventory, reserve replacement, there has to be massive M&A activity. The biggest issue is that people – we had a series of companies in 2020 and 2021 that sold out toward the bottom of the market and sold out a small premium. Nobody wants to sell out at a small premium.

Now, eventually, what will happen with a lot of these companies that don't sell out, the multiples will continue to decline as their inventory depletes. So they have a choice. Do I merge with somebody, with another inventory in high grade, or do I just take a lower, lower, lower multiple over time. That's what I predict will happen. So it'll be a combination. Some will choose the merger route, and some will choose just to stay.

Now, I'm going to use the vertical drilling program as an example since we drilled the most vertical wells of anybody in the Permian Basin over the last 40 to 50 years. You have to realize the vertical reservoir pressure decline is declining in the Delaware in the Midland basin. So as we drill more and more wells, reservoir pressure is declining. So, we took the vertical Sprayberry, the conventional from 160s to 80s to 40s to 20s. So one of the pluses of the Permian, once it hits that peak at 8, 7 – call it, 7, whether it's 7.5 or 6.5, it's going to stay flat for about 30 years, in my opinion. So people will continue to down space, oil price will be higher, they'll get more capital efficiency. So never expect the Permian to roll over, in my opinion. It will be flat for a long time once it peaks.

Neil Mehta

That's an out of consensus view, Scott, because there's a perception that the decline rates will start to catch up with the Permian as you get to that plateau level, it's going to be hard to sustain without a step up in capital spend. So maybe you can talk about it from an engineering standpoint. What needs to happen to maintain a plateau without capital efficiency going wrong way?

Scott Sheffield

As people flatten the production, obviously, the decline rate will lower for everyone. So instead of growing 5% a year or 10% or 15% or 20%, instead of being in the mid-30s, people will move down into the high 20s, in my opinion, maybe even the mid-20s in the Permian over time. The more gas will actually help in regard to the capital efficiency. I'm definitely a strong believer in higher natural gas prices over time, too, along with oil.

And the question is, is how far it has enhanced oil recovery and also these other zones, whether the Barnett Woodford takes out through both the Midlands and the Delaware basin, enhanced oil recovery? The question is, is can we get enough supply of CO2? CO2 will work better than wet gas. We've already proven that wet gas works as a miscible agent. Question is, can we get enough CO2 with Occi's project or bring in CO2 from the Gulf Coast long term. We're only getting 6% of the oil out of the ground. So the more enhanced oil recovery works, it will also flatten that decline curve. And small companies aren't going to be able to afford it. It'll be companies with contiguous acreage and large acreage positions.

Neil Mehta

Let's talk more about 2023 in the Permian and some of the constraints that exist in the system, which of them are more transient versus structural? Maybe the first one is talk about the gas takeaway situation in the Permian. Henry Hub has come down, but Waha has been soft over the course of the last six months independently. When do pipes come online and how is Pioneer positioned, given that you have a better takeaway position than most?

Scott Sheffield

There's two big expansions coming on by the end of 2023. The next large pipeline coming on by the third quarter of 2024. But that's not going to solve – this has to happen every 18 months to two years. So you've got to think about more stuff – expansions got to start in 2025, another pipeline in 2026, which hadn't been announced yet. So I think the Waha problem is going to continue off and on for the next decade, in my opinion. So, you're going to see it do exactly what it's doing. 75% of our gas is either going to the Gulf Coast or California. So, right now, a lot of our gas is going to California and collecting $40. So, if you watch the California market, a lot of it's going to the Gulf Coast. Eventually, 25% of our gas will get down to about 5% once these expansions – so it's really parsing the double point that didn't have access to long term capacity when we purchased them and we'll be adding them to the expansions into the new pipeline. So Pioneer by the summer of 2024 will be down to 5% Waha.

Neil Mehta

NGL prices have come under pressure as well, Scott. How do you think that changes the economics of whether privates are willing to – with the weakness in global gas and in NGLs and in the softening of the crude curve, at least in this air pocket, are going to attack the 2023 growth plans?

Scott Sheffield

If you look at most privates, the two biggest privates, Mewbourne and Endeavor, have been essentially a flat rig count since last summer. One's at 15, one's at 19. If you look at the private percent of the Permian, it's actually going down. So any increases – in fact, I did make the point earlier, Delaware is up about 10% since last summer, mostly in New Mexico, and the Midland basin is flat. So the privates are coming down in the Permian. One of the big reasons is that they don't have takeaway capacity. The pressure on flaring and venting has continued to increase and be there in the Permian. That's going to keep them from – besides inflation – we know inflation is up 10% to 15% in 2022. Most companies are in that 10% to 15% for 2023. Nobody wants to build a new rig because the new rigs are going to cost 30% to 40% and you've got to sign a three-year contract. And so, somebody told me, Patterson made a comment that they're up to 38,000 a day. That's unheard of. The strip is what I said earlier, the next five years is $70. And so, something's got a break in between. And so, I just don't see the rig count really increasing at all in the Permian. If anything, it may decrease a little bit. So, the privates are definitely going to be held back because they don't have takeaway capacity. Also, there's going to be an issue with midstream companies not having the capital. Look at the number of 200 million a day plants we have to build. Target is staying ahead of the game, but the rest of the other midstream processors are not. They're falling further and further behind. So that's going to be an issue in regard to growth in the Permian also in the midstream.

Neil Mehta

And talk about how Pioneer manages the cost inflation dynamic around services companies. Service companies have under earned for many years, their returns on equity. And they're looking at the E&Ps earning solid returns on capital and, understandably, asking for their piece of the pie.

Scott Sheffield

No, I don't blame them being in the industry for as long as I've had. I think the best formula is to tie it. I've been surprised how volatile WTI and Brent was in 2022. It's the tightest supply/demand I've seen in my 50 years. And then, we have oil fluctuating from $75 to 125 or $125 down to $75, where Brent went down to $75, WTI went down to $70. It really doesn't make sense.

And so, service companies have to have that return. They've got to return capital back to their shareholders. So, to me, I think the best mechanism that I've seen that we've done with all the providers, you've got to tie it to an oil price. And so, when oil prices are high and up, they get a higher price. When they're down, they get a lower price. That's really the only mechanism that I see that will work with the service companies.

Neil Mehta

Let's tie it all together. This is a great perspective on the Permian. If you think about exit to exit, US this year, probably – oil is going to look like 700,000, 800,000 barrels a day, it seems like, based on the monthlies. Weeklies are a little noisier. How do you think about exit to exit US oil in 2023 versus 2022?

Scott Sheffield

Yeah. I look at that 700,000 and it's probably 150,000 that's Gulf of Mexico. And you've got to look at that versus the hurricane. So, I look at September and October monthly. So, I focus on all the oil shale states. And so, basically, they're all flat except Texas and New Mexico. So, Texas is up – if you look at September to September is up 150,000. If you look at October, it's up 200,000. But you've got to share Texas with the Midland Basin, the Texas Delaware and the Eagle Ford. And the Eagle Ford did have some growth. So, long term, those three plays are only – in my opinion, they are tapped out at 150,000 to 200,000, in my opinion, oil. So, that number is going to come down over the next 12 months, in my opinion, based on all the things we've talked about.

Now, you look at the two counties in New Mexico, they're up 350,000. So if you go into [indiscernible] and S&P data, there's five companies that run 80% of the rigs in those two companies. If you look at their inventory on high return – I'm talking about high return inventory, it's only about three years. So within three years, that 350,000 growth is definitely going to slow. It's going to drop off significantly after a three-year time period. So New Mexico is going to slow from 350,000.

When you put those numbers together, ignoring the Gulf of Mexico, I look at dolo shale, I've been saying 500,000 to 600,000 for the last probably 12 to 18 months where the EIA was at a million or higher. I'm saying now probably about 400,000. I'm ignoring the Gulf of Mexico. I don't follow as closely as I used to. But I'm saying about 400,000 for non-Gulf of Mexico. In lower 48, 400,000. And that will continue to decline over the next five years.

Neil Mehta

That's exit 2023 versus 2022 black oil. That's good color. Let's talk about the production plan. And then we want to spend some time on talking about return of capital. And then lastly, we'll spend some time on policy as well, which I know you spend a lot of time on as well.

I think there's a lot of confusion around Pioneer, whether on the sell side or the buy side. Is productivity going the wrong way? Was last year not as good of a year for execution as expected relative to peers? And I think what you you've talked to me about is a lot of it is just about timing. And it's not a reflection of anything in the asset base. But I want to give you the forum to talk about how you're seeing that and respond to some of the bear cases that might be out there.

Scott Sheffield

Obviously, the data pointed – we should have the best type curve in the Midland Basin. So that starts with point one. So when we started looking at our data, and the data, we ended up drilling, in my opinion, too many delayed wells. Delayed wells, you should not drill a delayed well, whether it's in the Delaware or the Midland. You get a less productive well, if you drill a well six months or two years after the fact on a delayed well. And it was basically experimentation. And so, when we saw our type curve getting to the middle of the pack for the year 2022, among all the players in the Midland basin, we said we've got to make a change. So we increased our hurdle rate. And as I said earlier, Rich and I got involved in every well, every location, all 500 wells and looked at it well by well. Generally, we are responsible for capital allocation. But a lot of times, you've got to trust your employees, but we got involved in every location.

And so, our goal is to be at the top of the Midland Basin in regard to that curve. We can do it significantly for several years. And so, you're going to see an improvement back to 2021 or better for the next several years. And we can do that for easily 15,000 locations for a long time. So that's basically what happened with us.

Neil Mehta

So walk us into the room. So how do you approach that process of looking at the 500 wells and which ones to let?

Scott Sheffield

It was simple. By picking the – we raised our hurdle rate, which knocked out, obviously, some locations. The locations, when I say knocked out, they get drilled 8, 10, 15, 20 years from now. And so, it's as simple as that. We have to move our type curve back up. So it's as simple as that.

But when you have this massive position that we have, there was wells – we questioned why are we drilling in this area, why are we drilling in this area. And some of them may be leases held by production. Or some of them may have been to protect a lease. And so, there's other ways to solve that problem, basically.

Neil Mehta

Scott, you showed a great chart that showed average 2023 to 2027 type curves relative to the 2022 type curves and the step up in capital efficiency that you anticipate, in productivity that you anticipate. But when do we see it in calendar 2023? Is that a mid-year?

Scott Sheffield

The first wells are drilled in first quarter. So we report those second quarter, basically. So, by May, you'll see the first quarter results.

Neil Mehta

Let's talk a little bit about return of capital. As you said, you've put up $26 of dividends in in 2022, at least $26 in dividends, which is a 12% dividend yield. How should we think about, in the current commodity environment, what the dividend could look like in 2023? And you had indicated you're going to be countercyclical from the buybacks. The stock has pulled back and you're still constructive on the commodity as are we. Does it make you want to change the composition a little bit more buyback versus dividends?

Scott Sheffield

No. All the shareholders – when we went out to all of our shareholder base, 99% of them preferred dividends over buybacks. And we will continue to go out and talk to people over the next year. But for instance, I've been upfront with people, I collected myself $16 million, $17 million. So, I got more compensation of dividends than I did my total compensation as CEO.

So, people don't look at the fact – when you get $26, what do you do with that $26? They make another investment. And so, I notice in stock returns, a lot of people report Pioneer stock return for the year. They don't include the dividends in their analysis, a lot of the analysts. And so, when you talk about $26, it's a big number. And so, we will continue with that policy. It's been positive. Unless our current shareholder base want us to change it. And I always will go back to the shareholder base.

With the strip, I've asked myself, the strip stays in backwardation, it gets up to $150 backward dates to $100 and continues that for the next seven years, I probably would have wished I bought back more shares.

So, that will be a question that we should ask ourselves, what's better long term?

Neil Mehta

How do you think about when do you lean into share repurchases? You did a billion and a half dollars over the course of the last year. Is it when the stock gets dislocated?

Scott Sheffield

So far, if you look at the majors, most of their stock purchases are dismal. They bought them at the top of the market. If you go back to each of the majors and look over the last 20 to 25 years, independents historically have never bought back their stock until the last 18 months. But the majors' track record is terrible. Exxon has announced they're buying back $50 billion. They got so much cash flow that they have to buy back the stock.

So in my oil price scenario, it's going to look to be a great purchase most likely. But if oil is $60, $70, that spend, that $50 billion may not long term. And so, independents track record, it'll be interesting to see what happens. But you have to have a strong oil price. We will continue to buy opportunistically. I think our average price is $218, close to the current price. So, it's probably better track record than most companies in regard to where to buy back to stock, the independents especially.

Neil Mehta

Let's talk a little bit about the way you're thinking about policy and spend some time on the environmental side, which is important part of the conversation we have with investors as well. What do you think the risks are out of Washington, as we think about energy policy here in 2023? Or do you feel like that there is a supportive enough environment that doesn't affect the way that you approach your business? And then we should talk a little bit about OPEC as well.

Scott Sheffield

Sad to say we've seen what's happened with the current administration from the time they came into office two years ago, asking us to drill more. They don't understand the inventory, they don't understand inflation. And so, there's been a big debate about whether or not companies should drill more, obviously. And as I stated in the Financial Times interview recently, it'll bring the industry back to the bottom of the S&P 500. Can you imagine if we would have done what they said over a year and ramped up production and grew production a million barrels a day going into this recession, zero COVID policy. Oil price today would be $50 a barrel. And so, our industry will be back to the bottom of the S&P 500. So it's working.

Origin's comment about 5% of the S&P 500, I'm a firm believer, we'll get up to 10% to 15% for the reasons that we've all said. So we can't go back there. This is the first US president – to my knowledge, I haven't found a CEO yet he has talked with. He has not talked to any oil and gas CEOs. And that's the first US president that I know of that has not talked to anybody from our industry. He has other people that's talked, Department of Energy, others.

Obviously, if the Republicans can find a speaker, there's a block over the next two years. And it's going to be interesting to see what happens in 2024. So I think we're at a stalemate for our industry for the next two years, nothing else will happen. So I'll leave it there.

Neil Mehta

And if we do get a price spike over the course of the summer as we work through zero COVID and we get into the seasonally stronger period and refining capacity starts to ramp up as well, do you see the risk that the administration does something again, whether it's release more SPR, whether it's implement an export ban?

Scott Sheffield

Yes, the only thing the President has the power to do himself is export ban on LNG, our products and oil. So, he can do that with a stroke of the pen. So that's probably the biggest risk. Obviously, [Technical Difficulty] have been done recently and previously to show what the impact that would have on the industry. If you want to import more crude oil from the Middle East, that's the best policy. And it's not going to lower the price of gasoline to the American consumer because it's based on Brent. But that's his most powerful tool.

We've seen Australia and Europe go to some type of windfall profits tax. With the House being definitely Republican, I see no risk of that in regard to windfall profits tax. But as you know, if our scenario, whether my scenario or Jeff's scenario, if oil gets to $150, then people are going to look at ways – it's already impacting the North Sea in regard to windfall profits tax on the UK side. And so, it's again not the right message. But you'll see people speak more and more about it. If we get to that scenario where oil is $150, gasoline is again at $7, $8 in the State of California. California will probably do their own windfall profits tax. You may see some states do that possibly. But those are some of the things that could happen. But with the Ways and Means Committee controlled by Republicans, I see no changes. I don't see that happening in the next two years.

Neil Mehta

Yeah. And bans on federal land, which matters less, because your Midland, still unlikely in this environment.

Scott Sheffield

I just don't see it. They need more production. So why hurt the State of New Mexico, which is pretty much a strong Democratic state. They rearranged. Now they have 100% of Congress is Democratic from the State of New Mexico, which affects obviously the Delaware. People don't realize, one-third of the revenues in the State of New Mexico comes from oil and gas.

Neil Mehta

Scott, you spent a lot of time with OPEC as well. You've spoken at OPEC over the years. Talk about the dialogue that you're having with OPEC participants as well. And what do you think – it's a question we asked Jeff as well. How do you think about their calculus over the next couple of years?

Scott Sheffield

No, I agree. Saudi is not going to let Brent stay around $75. $75 average or even $73 average in the next five years, it won't happen from the standpoint of ABS and MBS. Their breakeven budget is over $80 a barrel. You've seen what MBS is dealing with the country, with neon and other things that are going on in the country. They need oil to be at $100 a barrel or higher in my opinion. OPEC ministers are frustrated over the recent price fall. It's understood. I think is going to change. If it stays too low, it wouldn't surprise me if they have another cut. But they've got to wait till February 5 to watch the product ban on Russia. They've got to see what happens with the COVID policy being 100% reversed in China. And then, we'll see what happens in the next 90 days.

Neil Mehta

So you've laid out a very constructive oil view. You said you're also constructive on natural gas when it's 80 degrees across America. It's hard to be bullish at this moment. But you look out a couple of years, there is an interesting bull case. Talk about how you're thinking about the potential supply air pocket that we might have for the next couple of years, relative to the structural demand side of the equation.

Scott Sheffield

Obviously, we're going from about 12, 13 BCF exports, we'll probably get up to 20 BCF. It wouldn't surprise me if we get closer to 25 BCF. We will be the largest exporter in the world. The gas over the last few quarters, call it, two to three years, is trading at 17, 18 to 1. So if you look at my bull price in oil, there's no way gas is going to stay at $4. So, if you had $100 oil, divide by 17, I'm probably more of a long term $6 gas person, long term. There's plenty of gas there. The gas people have learned not to over drill also, not to put too much gas and get it trapped again. I think they've learned their lesson as the oil people have to, trying to get returns back to their shareholders. And eventually hope that there's a world price on gas. And long term, we talked a lot of the people. I think they'll eventually be a world price on natural gas.

Neil Mehta

How do you get closer to JKM or TTF? And, of course, again, right now those prices have moderated, but they're still trading at five to six times relative to the US Henry Hub price. How can you get your barrels to market into those international markets to get a better gas price realization?

Scott Sheffield

You have to end up signing 15-year long term contracts with the LNG players. A couple of the independents have done that. We've continued to look at. We eventually think it'll equalize. So whatever the world price is, back off the liquefaction and the transportation cost, they're just like Brent, WTI. I think eventually it'll equalize. Yeah, so why commit to a 15 year contract is our question.

So you're going to have spikes like we've seen. You're always not going to have Russia do what they did and see that spike go up as high as it did. So, it's hard to make that investment to play that market. But eventually, I'm a firm believer, it'll equalize like Brent, WTI has historically, is that JKM and TTF will equalize with Henry Hub long term.

Neil Mehta

Some model specific questions. As we make the turn into 2023, talk about capital budget. Where we were in 2022? What are some of the moving pieces that investors should keep in mind as they're modeling out 2023 spend?

Scott Sheffield

Long term, we are really – we did not grow 5% in 2022. We grow 0% to 1%. When you model what happened in our acquisitions in 2021, we grew in that 0% to 1% range. We're really focused on long term growing closer to 5%. So I think in 2023, 2024 2025, 2026, we will try to hit closer to 5% growth. You'll see that as a change. And then you'll see us beginning to – continue to test enhanced oil recovery and you'll see us, as we've been public about, drilling a series of deep wells in the Barnett Woodford, maybe test shallower zones and other zones over the next five years. We have another probably eight zones we haven't tested, things are getting very positive. Basically, the big surprise to me, we thought the Barnett Woodford was going to be condensate. Occi has announced four great wells in just – near Midland. We're surrounding them. The gravity was 43 degree gravity. That was the big surprise to me. And so, you're going to see other zones being tested, like that. And so, you'll see us do that in 2023 and on. So those are the some of the upsides that I see. But I think you'll see us try to move closer to that 5% production growth.

You asked about capital, I think we've been up – we're going to add, continue to add about two rings per year, and capital will be up about 10%.

Neil Mehta

How do you think about – it's early to talk about 2024 and beyond. But when you talk about the 5%, you're talking oil specifically?

Scott Sheffield

Yes. And gas will be a little bit higher.

Neil Mehta

Gas will be a little higher. Okay.

Scott Sheffield

If we all go to this service cost and we all sign contracts with WTI and Brent fluctuating, we're all going to have to figure out how to build that into our budget. Okay? So, that's one of the hardest things. Companies are going to have to give wider ranges, in my opinion. So, if 50% to 75% – service companies don't want to do a fixed cost. We've tried that for 40 years. It's almost impossible to do a fix cost for a two or three year timeframe. So we all go to this oil price fluctuation. We're all going to have to build that into our budget range that we give. So, if oil is $70, our budget could easily come $200 million. If oil was $100, our budget could go up $200 million. So that's one of the big issues we're all going to have to deal with if we get the right formula for the service companies.

Neil Mehta

The 5% number is a longer term CAGR? 2023, it sounds like it could be a little bit lower as you work through this.

Scott Sheffield

Yeah, it'll be in that 2.5% to 5% range.

Neil Mehta

As it relates to service cost inflation, you have a unique relationship with ProPetro. How's that timing of pressure pumping contracts affect the potential inflation that you're seeing?

Scott Sheffield

You're seeing us diversify among the various frac companies. You're seeing us move more toward and trying E&G fleets, using a combination of CNG, LNG, using gas from our wellheads to run it and eventually electricity. And so, the grid has to change significantly in the Permian Basin. It will. It'll be slower. But that's the – eventually, most wells – by 2030, I would say most wells will be on E fleets and using the grid, whether it's at Pioneer and the larger companies for sure.

Neil Mehta

How do you get credit for your inventory depth? It's something that we talk a lot about as it relates to the majors. Or even companies that have a lot of inventory that can be prosecuted in 2035 or 2040 and they pull forward that value. Does it make sense to monetize some packages?

Scott Sheffield

We've been asked that for years. As you know, there's a lack of capital. People don't pay much for that. And so, the best way we found is using private equity money. And so, they put up the capital. And after somewhere between 12% and 15%, return, we back in for the rest of it. And so, you'll see some of our programs start kicking in 2023, 2024 and 2025. But the market is not there. There's nobody out there paying $10,000, $15,000, $20,000, $30,000 per acre. And that's what it's really worth. And so, there's no way to monetize inventory. So to get credit – if you look at the longer inventory companies, I think we should trade a higher multiple, all companies with long inventory. We're only trading a half to one turn above companies with shorter multiples. But eventually, my opinion is, as I said, the company with shorter multiples have to continue to make, to me, dilutive acquisitions that hurt their inventory. So that's what's going on now. It will dilute their current inventory. Companies will have to do that. And eventually, the market will recognize that in my opinion, and there'll be a bigger spread. Either, they will go down, our multiple stay where it is. Or if we do get up to 15% of the S&P 500, the multiples will expand for longer lived inventory companies.

Neil Mehta

And that's the pushback we get on our positive Pioneer view. Many look at your free cash flow yield or even EBITDA and say that you trade at a premium multiple relative to peers, but it sounds like your counter is you've got more inventory depth.

Scott Sheffield

And we got higher – our free cash flow margins – returning 95% of our free cash flow back to the investor. Those are also things that beat our competition.

Neil Mehta

Last question around balance sheet. You effectively have no debt on the business or very low leverage levels. Do you have the optimal capital structure or does it make sense if you go into air pocket around commodity prices to be more aggressive around returning capital and taking a little bit more debt on to the business in order to fund it?

Neil Mehta

Our debt to EBITDA is down at 0.3. Longer term, I personally would like to get down to zero. I think that's the better balance sheet in a fluctuating commodity price long term. So, what you want to do is be able to – when you look at what happened in 2020, when our stock got down to $50, you want several billion have firepower to be able to go in there and buy the stock really cheap. And there was not one oil and gas company including the majors that bought their stock in the bottom of the COVID market. And that's when you really want the firepower to go in there and buy the shares. We know our business, we know it's going to come back. And so, that's the reason you want the balance sheet to zero debt.

Neil Mehta

Scott, I hope you have a great conference. Thank you so much for being here. Good conversation.

Scott Sheffield

Thank you.

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