Reliance will pay $266m in cash to Pioneer at closing and will pay an additional $879m to carry Pioneer’s share of future drilling costs (drilling carry). Reliance will also participate with Pioneer in the development of midstream assets in the Eagle Ford Shale as a 49.9% partner.
Closing is expected within five business days. Reliance has also entered into a JV agreement with Pioneer’s existing partner in the Eagle Ford Shale play, Newpek, for total consideration of approximately $210m.
The JV agreement is effective June 1, 2010. Under the agreement, Reliance acquires 95,300 net acres of leasehold held by Pioneer. Pioneer retains an average 42% working interest in the acreage and Reliance receives an average 41% working interest, with other working interest owners continuing to hold the remaining 17% working interest.
Pioneer continues as operator. Reliance has the right to perform certain drilling and completion operations beginning in 2011 – one rig initially escalating up to four rigs under the current drilling ramp-up schedule.
In addition to funding its own drilling obligations, Reliance has agreed to fund 75% of Pioneer’s portion of drilling costs until the $879m of drilling carry is fully utilized. Pioneer has six years to utilize the drilling carry, subject to extension under certain circumstances.
Pioneer and Reliance have agreed to a JV development plan, which forecasts the drilling of 26 horizontal Eagle Ford Shale wells during June through December 2010, increasing to 70 wells in 2011, 120 wells in 2012 and 140 wells in 2013.
Pioneer has drilled and completed six horizontal wells in the Eagle Ford Shale. Five of these are on production at a combined rate of 28 million cubic feet equivalent per day (gross) and the sixth is expected to be brought online late in the third quarter following the completion of a central gathering facility.
Pioneer recently increased its drilling activity in the play from two rigs to five rigs. These rigs are currently drilling in Live Oak, Karnes and DeWitt Counties. Three additional wells are awaiting completion. Pioneer is also purchasing a new fracture stimulation fleet to support the JV’s drilling ramp-up. This new fleet is expected to be operational by the second quarter of 2011.
Pioneer and Reliance expect to continue to grow the JV’s Eagle Ford Shale leasehold position within an area of mutual interest (AMI), which includes six counties in Texas. Pioneer will act as the sole leasing agent for the JV in the AMI.
Reliance will have the option to acquire a 45% interest in Pioneer’s share of such new acreage under comparable terms to those agreed to by Pioneer with the leasehold owner. The JV will own approximately 9,500 net acres within the AMI that have recently been acquired by Pioneer.
The companies will also develop a midstream business, which will initially consist of central gathering facilities to separate condensate production from produced gas and to treat the produced gas.
Based on the JV development plan, Pioneer’s net production in the Eagle Ford Shale is expected to increase from an average of 2,000 barrels oil equivalent per day (boepd) in 2010 to a range of 32,000boepd to 41,000boepd in 2013.
