Pioneer Natural Resources Company (PXD - Free Report) has inked a farm out agreement with a U.S. subsidiary of Sinochem Group – Sinochem Petroleum USA LLC – for a portion of the company’s acreage in the highly prospective horizontal Wolfcamp Shale play.
Pioneer intends to divest 40% of its 100% holding in the shale in the southern portion of the Spraberry trend area field for $1.7 billion to Sinochem. Pioneer will retain its current working interest as well as operatorship in all horizons shallower than the Wolfcamp horizon.
Upon the closure of the deal, which is expected in the second quarter of 2013, Sinochem will make a cash payment of $500 million to Pioneer. A further amount of $1.2 billion will be carried over and adjusted toward its future drilling and facilities costs (drilling carry).
Pioneer holds net acreage of around 207,000 in the Wolfcamp, of which Sinochem will receive interests in around 82,800 net acres. The joint interest area includes defined portions of Upton, Reagan, Irion, Crockett and Tom Green Counties in Texas.
Sinochem has decided to finance 75% of Pioneer’s share of drilling and facilities expenses after closing until the $1.2 billion of drilling carry is fully utilized. Sinochem will also fund its share of drilling costs for the horizontal Wolfcamp Shale. Pioneer has six years to use the drilling carry from the effective date of transaction of Dec 1, 2012, till the date of closing.
Per the development plan, both the companies have proposed to drill 86 horizontal Wolfcamp Shale wells in 2013. This will increase to 120 wells in 2014 and 165 wells in 2015.
Sinochem’s recent deal to purchase a portion in the U.S shale in exchange for funding drilling costs follows other recent deals by Chinese major CNOOC Ltd. (CEO - Free Report) and China Petrochemical Corp. The former farmed in to a portion of Chesapeake Energy Corporation’s (CHK - Free Report) Niobrara shale project in 2011, while the latter inked a deal with Devon Energy Corporation (DVN - Free Report) in 2012.
Pioneer holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.