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Chairman's Message

Chairman and CEO Scott SheffieldFellow shareholders,

2010 was a truly stellar year for Pioneer.  We reported record earnings of $605 million, or $5.08 per diluted share, and cash flow from operations of $1.3 billion.  Pioneer was well positioned to take advantage of higher oil prices with a strong base of oil and liquids-rich assets, and we significantly enhanced the value of our holdings in two core asset areas, the Spraberry field in West Texas and the Eagle Ford Shale in South Texas.

We had considerable success with our accelerated drilling program in the Spraberry field where we are completing vertical wells in additional shale and silt pay zones and drilling deeper to the Lower Wolfcamp.  Average early production from wells that include these additional pay zones is up 30% or more, resulting in a similar increase in estimated recoverable reserves without significant increases in drilling and completion costs.  Pioneer is also evaluating additional upside from horizontal drilling in the Wolfcamp and formations below the Wolfcamp.  

We also made significant progress in the Eagle Ford Shale, which continues to gain attention due to the enhanced value of its liquids-rich production from a large part of the play. With a long history of operating in the area and a substantial acreage position, Pioneer announced a joint venture in 2010 with Reliance Industries, India’s largest industrial company, that is allowing the Company to further accelerate drilling and build infrastructure. Pioneer has drilled more than 40 horizontal wells, has seven rigs running in the play and is making significant progress on the construction of essential central gathering facilities.

Strong execution was key in reaching our aggressive drilling targets, but also in our production maintenance and cost management programs.  All asset teams did a great job optimizing existing production and controlling costs, and I’m particularly pleased with continued improvement in our health, safety and environmental performance metrics.

We significantly expanded our integrated services model, adding drilling rigs and equipment to perform fracture stimulation and well servicing operations.  Owning our equipment is a significant advantage for Pioneer, giving us more control over costs and access to these critical services.  For example, we estimate savings of approximately half a million dollars on each well we drill in the Spraberry field under our integrated services model.

We drilled 482 wells during 2010.  Production per share was at the top of our target range, on a debt-adjusted basis, and despite significant cost pressure, we kept operating costs within our targeted ranges.  Pioneer significantly reduced debt, and I am particularly proud of our 2010 finding costs of $7.30 per barrel oil equivalent (BOE) and reserve replacement of 363%, or $11.42 per BOE and 232% respectively, before the benefit of oil and gas price-related revisions. We added 163 million BOE of reserves, including the effect of oil and gas price-related revisions, and significantly increased our net asset value on a proved-reserves basis.

These strong operating results translated to exceptional stock price performance.  For 2010, Pioneer’s stock price increased 80%, compared to 26% for our peer group.  Consequently, Pioneer was the top performing energy company in the S&P 500 and the 11th best S&P 500 performer overall.  Looking back at the two-year period covering 2009 and 2010, Pioneer was the top energy stock and the 7th best performer in the S&P 500.

Liquids-Rich Focus for 2011

We have another exciting year ahead of us, with plans to continue to aggressively expand our drilling programs in the Spraberry field and Eagle Ford Shale, increase our activities in the Barnett Shale Combo play, proceed with our development plan in the Oooguruk field, further expand our integrated services, maintain our solid base of producing assets and control costs. 

On January 6, 2011, Pioneer announced the sale of its Tunisia business, essentially completing the plan we announced in 2006 to divest our international and Gulf of Mexico operations and narrow our focus to our U.S. onshore assets, primarily in Texas.  The transaction closed in February, and Pioneer plans to use the $866 million of proceeds (before normal closing adjustments) to fund a portion of the expanded 2011 drilling program and to further reduce debt.

Oil prices remain strong, but the outlook for natural gas prices remains unclear. Pioneer is one of the most liquids-rich independents in North America, a distinct advantage in this environment, with expected returns heavily favoring investments in oil or liquids-rich plays. 

The $1.8 billion capital program planned for 2011 includes $1.6 billion for drilling operations and $.2 billion for vertical integration and facilities and excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical general and administrative costs.

In the Spraberry field in West Texas, Pioneer holds approximately 900,000 acres, or approximately one-half of the field, and has the advantage of more than 30 years of Spraberry operating experience.  We have more than 20,000 drilling locations in inventory and are presently operating 30 rigs with plans to increase the rig count to 35 by mid-2011 and to 40 or more in 2012.  Based on the accelerated drilling plan and incremental production generated from drilling to deeper intervals, Pioneer’s Spraberry field production is expected to double from 2010 to 2013.  We also have a two-well program underway to test horizontal drilling in the Wolfcamp and are encouraged with the early results of our waterflood project in the Upper Spraberry.

In the Eagle Ford Shale, Pioneer and our joint-venture partners have agreed to an accelerated plan, reflecting an increase to 12 rigs by the middle of 2011 and to 14 rigs in 2012.  Pioneer’s net production in the play is expected to grow by at least 140% in 2011 and then double from 2011 to 2012. We will continue to work to control cost inflation in the play, further reduce drilling times and optimize completion techniques.  Build out of our midstream facilities continues, and a number of third-party agreements are in place to process and transport our growing production.

Pioneer continues to increase its holdings in the liquids-rich Barnett Shale Combo play, where we have acreage representing more than 600 drilling locations under lease.  We have acquired 3-D seismic data and commenced drilling in the play in the latter part of 2010.  We currently have two rigs operating and plan to expand our 3-D seismic data during 2011.

To improve the execution of our drilling and completions programs and reduce costs, we have purchased additional fracture stimulation fleets for delivery in 2011 for use in our Spraberry, Eagle Ford Shale and Barnett Shale Combo asset areas and have entered into contracts for dedicated third-party fracture stimulation.

Pioneer was the first independent to operate on the North Slope of Alaska, discovering the Oooguruk oil field in 2003 and initiating development drilling in early 2008.  We will continue to operate one rig during 2011 and are currently drilling a well to the Torok formation.  Later this year, drilling will resume to the Kuparuk and Nuiqsut formations.

Protecting cash flow through production optimization and cost management will continue to be the focus for our Mid-Continent, Rockies and Edwards Trend asset teams.  Until natural gas prices strengthen, we will continue to limit natural gas drilling and rely on these long-lived natural gas assets with steady production and slow declines to provide essential cash flow.

The abundance of new U.S. natural gas resources from shale formations and other unconventional sources has been firmly established, and new drilling by many companies continues to support production and keep natural gas prices low.  Expanding the use of natural gas provides our nation an immediate opportunity, using existing technology, to reduce emissions and reduce reliance on imported oil, and I expect that demand will strengthen as we take advantage of the opportunity to use this domestic source of clean-burning energy.

Delivering stellar results requires aggressive plans and disciplined execution.  I want to thank employees for their tremendous performance during 2010, for their dedication to Pioneer’s success, for upholding our corporate values and for protecting the environment and maintaining a safe workplace.  Pioneer was recently recognized as a Top Company to Work for in Dallas and in Texas, placing third and fifteenth, respectively.  We are deeply honored by these awards which are based on direct input from our employees.  Employees also supported their communities and positively impacted the lives of others by generously giving and volunteering their time in partnership with Pioneer. Their commitment and support are critical and much appreciated.

The advantage of Pioneer’s dominant operations in liquids-rich assets was apparent in 2010 and will serve us well as we look forward to another exciting year and outstanding results in 2011.  We are committed to continued success in the development of our strong core position in the U.S.  As always, I appreciate your support.

Scott D. Sheffield
Chairman and CEO

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