The U.S. produced roughly 8.3 million barrels of oil per day (MMbbl/d) in April, "the highest level for any month in 26 years," according to the Energy Information Administration. The drilling surge has put these numbers on the scoreboard: about 1.5 MMbbl/d of production in the Permian Basin, 1.3 MMbbl/d in the Eagle Ford and 1 MMbbl/d in the Bakken.

This astonishing turn of events is propelling many exploration and production (E&P) companies to new heights. Last year, Pioneer Natural Resources Co. was one of them, a leader in two of these plays, the Permian and Eagle Ford. Pioneer's shares rose 73% to be the best-performing energy stock in the S&P 500. Positive industry tailwinds and higher oil prices certainly pushed the Dallas company up and to the right, but under the direction of longtime chairman and CEO Scott Sheffield, it also focused on maximizing returns and production growth while reducing costs and gaining drilling efficiencies.

In the Permian alone, Pioneer has 40 years of drilling inventory ahead and could spend up to $200 billion to bring those opportunities to production. If oil remains above $90 the company will add as many as 10 rigs per year for the next 10 years. Sheffield even thinks Pioneer will eventually produce 1 MMbbl/d 13 to 15 years from now. It has 1,600 employees in Midland to make this happen.

In South Texas, production also is ramping up smartly, and it is completing new Upper Eagle Ford wells that could expand that play— as they say, the rich get richer.

For these reasons, Sheffield has been named the Executive of the Year for 2013 in Oil and Gas Investor’s Excellence Awards.

Scott Sheffield

Investor: Scott, you have an embarrassment of riches. Are you lucky or are you good?

Sheffield: I’d say we are both; that’s what I tell people. Basically we’re very fortunate because we’re in two of the top three oil plays in North America, the Permian and Eagle Ford (we’re not in the Bakken).

We're focused on four zones in the Permian that have the best returns: the Lower Spraberry, the Wolfcamp A and B, and the D, which some people call the Cline. We are drilling some wells in the Wolfcamp C but we don’t think the C is as widespread, as continuous. We’ll have some wells in the Jo Mill Shale and eventually in the Clearfork. Then you have four zones below the Wolfcamp where others are drilling horizontal wells, the Strawn, the Atoka, the Barnett and the Mississippian.

We haven’t drilled horizontal wells into these zones, but at some point over the next three years, we’ll go into them.

The gas shales were a game-changer and now the oil shales are becoming a game changer, for Pioneer and for the industry and for job creation.

Investor: Will the positive tailwinds of 2013 repeat this year?

Sheffield: Yes. For the first four months of this year our stock has been in the middle of the pack of the peer group. I think the market is waiting to see us ramp up in the northern Spraberry-Wolfcamp part of the basin, where we’re going from five rigs to 16.

We added 11 rigs in the first 90 days of this year and it takes time to see the results. With three-well pads, by the time you drill and complete them and tie them in, it takes four or five months to see production. So from those 11 rigs we added, you won’t see the effects until the second half of this year. We expect the stock to be a top performer, maybe not the leader again like last year, but I think we should be in the top quartile.

Investor: How do you manage such rapid growth?

Sheffield: Obviously we’re dealing with all the top drilling companies—H&P, Patterson, Nabors, Precision, Trinidad. They’ve all set up man camps around Midland, and we have our own man camp south of I-20, with about 150 people there. We do our own horizontal fracking with eight horizontal frack crews. We use third-party fracking too, but Pioneer is the 15th largest frack company in America by horsepower. With more than 1,600 employees in the Permian, we are already Midland’s largest employer, so it’s easier for us to attract people, rigs, crews, because of our size. We’re the most active operator in the Midland Basin and rank one or two in the Permian Basin.

Investor: How do you handle the logistics—the sand, the procurement?

Sheffield: It’s a team effort. We have been one of the most active companies in hiring ex-military people who handled logistics in Iraq and Afghanistan. We’ve hired about 100 veterans. We also have our own sand mine in Brady, Texas, only a three-hour drive from Midland.

Investor: Do you ever see a time when you’ll hive this off as a separate company?

Sheffield: No. There’s no reason to. It enhances our ability to execute if we manage it ourselves.

Investor: What changes are you seeing in the basin?

Sheffield: The oil rig count has continued to pick up; everybody is increasing activity. We’ve seen a lot of companies go public in the Permian, that’s a big change. We’re seeing big companies like Chevron, Oxy and Apache get more active in the Permian. We haven’t seen a pickup in natural gas drilling yet even though gas is up to about $4.50. I’m optimistic that once we see exports of LNG, gas will get up to $5.

Investor: Aren’t you concerned about the oil price in the out years?

Sheffield: As you know, there’s a lot of talk about the oil price, so it’s making it harder to plan over the next four or five years. The oil strip averages $97 for the rest of this year and we’ve averaged about $99 year to date. The 2018 strip drops to $80 for WTI. It’s for a combination of reasons: There is less liquidity in the market as the banks have had to unwind their positions under Dodd-Frank, and there’s the perception we’re putting too much crude into Gulf Coast inventory and we won’t be able to export it.

Investor: Is $80 a worry?

Sheffield: I think $80 is going to be fine for the industry. The industry will do very well; it just won’t have as much cash flow, so it won’t grow as much—but it will still grow. Now if it drops below $80, we would slow our growth from adding 10 rigs a year to five. We always say
$60 is our breakeven cost (that’s using today’s well costs). If it goes below that, well costs usually would decline 15% or 20%, so your breakeven changes, maybe down to $50 or so.

Investor: What about in the Eagle Ford?

Sheffield: We have mostly condensate there, so we’re getting roughly $10 off WTI. Our condensate is about 60 degrees API gravity, and that’s where I’m a bit more optimistic about exports being allowed by the end of this year. We’re producing about 1.3 million barrels a day in the U.S. of condensate, so it would sig- nificantly help if we could export.

Investor: What’s your take on too much oil, yet an export ban?

Sheffield: Turner Mason, a consulting company on refiners here in Dallas, calls it the ”Day of Reckoning,” when we have too much inventory and can’t put it through our own refineries. The big unknown is if Saudi Arabia will back down on its exports to this country. Canada continues to increase; Venezuela and Mexico are sending their crude. It adds up to 6 million barrels a day from those four countries. We’re importing only 7 million, so what’s unknown is what those four countries are going to do when we continue increasing our production.

The industry is working with the Commerce Department and the Administration to allow exports. A lot of refineries [elsewhere in the world] would love to have that mostly sweet crude coming out of the Bakken, the Eagle Ford and the Permian. It’s best to free it up— we’re exporting every other hydrocarbon: products, coal, natural gas, and we’ll be exporting LNG.

Investor: Have you been to Washington to talk about this?

Sheffield: Yes, several times, and I will continue to do so. They are looking at ways to solve this problem, such as exporting condensate, such as swaps with Mexico, and permits to export oil to Canada and then Canada can export it to Europe. With the $80 strip—most of us have stopped hedging in the out years, so the industry is operating under a higher risk profile, in my opinion.

Investor: But you are still hedged.

Sheffield: We are hedged 90% through 2014 and 75% in 2015, but not for 2016 or 2017. Normally we would have hedged a lot in 2016 by now, but the price is too low.

Investor: How is the JV with Sinochem going in the Permian?

Sheffield:The relationship is very good. They have the right to send technical people to our offices in Dallas and Midland. Right now they’re getting the visas, and they have set up a fairly large Houston office. They do weigh in on all the major decisions in regard to the joint venture. They have the right to have five people, granted by our JV agreement, in our offices here. We have monthly and quarterly meetings, and we have to take an annual trip to Beijing by agreement.

Investor: Any talk of your people going over to operate in China?

Sheffield:They’ve asked us but we’ve said no. We have gotten out of international operations, but we will obviously help them and give advice from here. Back in 2006 we decided that given what was going on [with technology advancements] in the Barnett Shale, we should focus our talent on the Permian and the South Texas assets. At the time we were dealing with countries like Argentina and Tunisia with political risk; we had geologic risk in the deepwater. We sold off our entire international portfolio, deepwater and most recently, Alaska. We’ll eventually sell the Barnett too—we’re pursuing that now.

It’s really just a refocus. Obviously, we did not forecast that we’d find billions and billions of barrels in South Texas or the Permian … as you know, it’s been a home run for us. When the Barnett was discovered, people thought you could not produce from oil shales because the rocks are so tight. It took time for people to realize that these oil shales do flow also.

All these wells need a combination of help. To start with, they flow for a few days and then we go to gas lift or submersible pumps. Eventually, after two or three years, most of them will have pumping units.

Investor: How do you compare the Eagle Ford and Permian for Pioneer?

Sheffield: The Eagle Ford is about 25% of our total production. All of our horizontal experience really began there and when we formed our Permian group, we moved many of our Eagle Ford people into that group. The Eagle Ford is really a science lab for us. We’re down to 40-acre spacing there with success, whereas in the Permian we’re still at 100 acres. We’re drilling the Upper Eagle Ford now with success, and it looks like it’s from a different source rock.