Chairman's Message
Fellow shareholders,
Over the past two years, we’ve successfully transitioned Pioneer’s asset portfolio to support a lower-risk strategy focused on delivering solid, consistent results, primarily driven by onshore U.S. core area expansion and other discovered resource development. This transformation was primarily the result of our divestment of relatively short-lived assets in the deepwater Gulf of Mexico, Argentina and Canada, with the proceeds being reinvested in our core growth areas and share repurchases. While we believe these actions were in the best long-term interests of shareholders, in the short term they had the effect of reducing cash flow per share, a key metric in the valuation of exploration and production companies. We believe that this is the principal reason for our stock price underperformance versus our peer group last year.
Our change in strategy is starting to deliver tangible results, which we expect to have a positive impact on our future stock price performance. During 2007, we reported strong earnings, steady quarter-to-quarter production growth and competitive all-in finding and development costs. Pioneer’s 2007 net income was $373 million, or $3.06 per diluted share, and reflected a 61% year-over-year increase in income from continuing operations to $242 million. Cash flow from operating activities for the year was $775 million.
Excluding production from Pioneer’s Canadian assets, which were divested during the year, we produced 35.5 million barrels oil equivalent (MMBOE) during 2007. Production per share rose 14% in 2007 compared to 2006 and was enhanced by our repurchase of approximately five million common shares during the year.
Pioneer replaced 357% of its production, adding 148 MMBOE of proved reserves in 2007 at an average all-in finding and development cost of $15.40 per barrel oil equivalent. We ended the year with net proved reserves of 964 MMBOE.
These strong operating results were primarily achieved through successful drilling programs and attractive core area acquisitions. Production from our core onshore producing assets – the West Texas Spraberry field, the Raton Basin in the Rockies, the Edwards Trend in South Texas and Tunisia – rose 18% through the year from prior year-end levels. We closed attractive bolt-on acquisitions in the Spraberry, Raton and Barnett Shale fields, adding more than 1,000 drilling locations.
In the Spraberry oil field, Pioneer increased production by 13% in 2007, drilling approximately 350 wells. We continue to have success drilling into the deeper Wolfcamp zone, which typically adds approximately 20% to the reserves and production of a Spraberry-only well. Pioneer is also pursuing opportunities to capture significant additional Spraberry resource potential, including 20-acre infill drilling, advances in horizontal drilling technology and secondary recovery. A similar drilling program is planned for 2008 with expected production growth of approximately 15%.
Pioneer completed approximately 300 coal bed methane wells in the Raton Basin during 2007, benefiting from improved drilling and completion efficiencies, and increased 2007 production by 10%. We expect to complete 175 wells during 2008 and again increase our Raton Basin production by approximately 10%.
We are particularly encouraged with our results in the Edwards Trend in South Texas, where we drilled 34 wells and increased production by 38% during 2007. Based on nine new field discoveries to date, we are gaining confidence that the resource potential of the trend may be much larger than previously estimated. Our 2008 drilling program is similar to the 2007 program and is expected to deliver production growth of more than 25%.
Pioneer entered the Barnett Shale during 2007 and built a land position of approximately 80,000 gross acres with more than 450 drilling locations. We plan to drill approximately 20 wells in 2008 and expand the drilling program in 2009 with significant production growth expected over the next three to four years.
In Tunisia, Pioneer’s production grew 65% in 2007 and is expected to grow 80% to 90% in 2008. Nine new field discoveries were drilled in 2007, and we initiated production from our operated Jenein Nord block during the fourth quarter. Jenein Nord oil production will gradually increase during 2008 as wells are tied in and gross facility capacity is expanded. We plan to drill 15 to 17 wells in Tunisia during 2008.
Offshore South Africa, gas and condensate production from the South Coast Gas project was initiated, and strong oil prices led us to extend the productive life of the Sable oil project. Since Sable gas is a large component of the South Coast Gas project, facility modifications are being planned to allow for the simultaneous production of Sable oil and gas.
The construction of facilities for the Oooguruk oil field on the North Slope of Alaska was essentially completed during 2007 and development drilling has begun. We expect to drill 13 to 15 wells in 2008 and initiate production during the first half of the year. On the Cosmopolitan project, offshore Alaska’s Kenai Peninsula, Pioneer has completed the drilling and testing of a horizontal appraisal well from an onshore pad. To determine the potential for future development of the project, we plan to begin permitting activities and continue facilities planning during 2008 and to drill another appraisal well in 2009.
When we announced our refocused strategy in 2005, we stated that we expected to achieve compounded annual production growth in excess of 10% over the following five years. Since then, we have successfully implemented our asset restructuring program and delivered 16% compound annual growth in production per share. Over the next four years, through 2011, we expect 12% compound average annual production growth with additional upside from share repurchases or continued success in expanding our resource plays.
This strong production growth, combined with the expiration of legacy oil and gas hedges, forms the basis for our expectation of greater than 20% compound average growth in annual cash flow over the next four years. We also expect our cash flow to meet or exceed the capital requirements of our drilling and development programs during that timeframe. By 2009, return on capital employed is expected to double from 2007 levels, reaching 14% to 16%, and income from continuing operations is expected to double in 2008 and triple in 2009, compared to 2007.
With all our efforts to reposition Pioneer's assets over the past few years, one asset has remained constant – our employees. The people of Pioneer have always been, and will always be, our greatest strength. We appreciate their commitment to the Company’s success and to protecting the environment and the safety of others. We are humbled by the time and financial resources they give in partnership with Pioneer to support the communities within our areas of operation.
2006 and 2007 were pivotal years for Pioneer. As we continue to execute our strategy in 2008, we believe that the market will reward our perseverance with an improved stock valuation. As always, we appreciate your support. Scott D. Sheffield
Chairman and CEO
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