Since November, Pioneer Natural Resources Co. (PXD) has been aiming to sell its Eagle Ford Shale (EFS) midstream business and shift the proceeds to the Permian Basin.

On June 1, the wait ended as Enterprise Products Partners LP (EPD) agreed to buy the midstream assets for $2.15 billion with roughly half going to Pioneer. The company has said that after the sale it would put its chips on the Permian, adding two horizontal rigs per month from July through the first quarter of 2016.

Under the terms of the transaction, Enterprise will pay in two installments, the first $1.15 billion at closing and the second, $1 billion, within a year. The price tag pays for Pioneer’s 50.1% interest in the business and the 49.9% share owned by Reliance Holding USA Inc., a subsidiary of India-based Reliance Industries Ltd.

Analysts said the purchase price was in line with estimates and that Pioneer oil volumes could grow by 20% as a result of the deal.

After retiring about $75 million in EFS midstream business debt, Pioneer’s share of the net sale proceeds, before normal closing adjustments, is expected to be $500 million at close and $500 million one year later. Pioneer said the sale is expected to result in a pretax gain of $725 million, which is expected to be recognized in the third quarter of 2015.

The deal should improve Pioneer’s balance sheet, which had $1.3 billion in cash and $2.7 billion in debt at the end of the first quarter. The sale will bring liquidity up to $2.78 billion, said Gabriele Sorbara, analyst, Topeka Capital Markets.

“We model a $336 million funding gap for the balance of 2015. For 2016, our model calls for an outspend of $979.1 million,” he said. “Based on our pricing, cost and drilling assumptions, we believe PXD could be fully funded through 2016.”

As part of the deal, Pioneer and Reliance will receive fee reductions from Enterprise under existing downstream processing and transportation contracts in exchange for extending the contract term to 20 years and dedicating additional Eagle Ford Shale volumes to Enterprise.

The reduced fees are expected to benefit Pioneer and Reliance over the original terms of the downstream contracts by about $200 million on a net present value basis at 10%.

In 2015, cash flow from the EFS business was expected bring $100 million in cash flow to Pioneer. Without it, Pioneer’s Eagle Ford production costs go up by about $3 per barrel oil equivalent (boe). Companywide, production costs will rise about $0.75 per boe, Pioneer said.

Permian Resident

Scott D. Sheffield, Pioneer chairman and CEO, said the sale of EFS Midstream will improve the company’s balance sheet and allow the company to go ahead with its desire to funnel cash to its core oil-rich Spraberry/Wolfcamp asset in the Permian Basin of West Texas.

The company will add an average of two horizontal rigs per month in the northern Spraberry/Wolfcamp through the remainder of the 2015 so long as the oil price outlook remains positive, Sheffield said.

“Additional drilling activity is expected to increase the company’s 2015 capital budget by approximately $350 million,” he said. “The addition of these 12 rigs will have minimal impact on forecasted 2015 production growth of 10% due to multi-well pad drilling.”

Pioneer has transformed the Permian area from a vertical to horizontal play. After the sale, its adjusted 2015 capex of $2.2 billion includes $1.4 million in the Spraberry/Wolfcamp, about 65% of spending.

“We are currently operating 10 horizontal rigs in the Spraberry/Wolfcamp,” he said. “Our strong balance sheet, combined with a strong derivatives position for 2015 and 2016, provides us with the financial firepower to ramp up drilling activity on high-return Wolfcamp B and Wolfcamp A horizontal wells during the second half of this year.”

Spending in the Permian includes infrastructure costs in 2015 of $460 million for the Spraberry/Wolfcamp area. To support ramped up drilling, spending will include tank batteries/saltwater disposal facilities.

The company will also spend $70 million on gas processing and gathering system connections.

Taking The Gas Pipe

The EFS midstream assets include 460 miles of natural gas pipeline, 10 gathering plants and 780 million cubic feet per day (MMcf/d), said Gordon Douthat, senior analyst, Wells Fargo Securities.

The sale of EFS midstream is also expected to enhance Pioneer’s ability to export processed Eagle Ford condensate, the company said. The midstream system includes 119,000 barrels per day (bbl/d) of condensate stabilization capacity.

Pioneer plans to increase export volumes in the second half of 2015 as additional industry infrastructure becomes available.

In June, the company expects to export 6,000 bbl/d on a spot basis. In the 2016, Pioneer is targeting exports of more than 75% processed condensate.

Pioneer has sold Eagle Ford condensate to Asian and European refining and petrochemical companies.