Pioneer Natural Resources: Long-Term Value Creator

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- By Faisal Humayun

Recently I have discussed energy names that have strong fundamentals and have delivered strong stock returns year to date.

The reasons for renewed focus on energy stocks are oil firming up and my view that the upside is likely to continue in fiscal year 2017. Another energy stock that has grown tremendously in the last few years is Pioneer Natural Resources (PXD), and I remain bullish on the stock even after a 46% upside this year.


I want to start with the company's balance sheet strength as it is the factor that will drive strong investments in the coming years. As of the second quarter, Pioneer Natural Resources had $3.3 billion in cash and liquid investments along with $1.5 billion in available credit facility. This liquidity buffer allows Pioneer Natural Resources to focus on accelerated development of assets as oil trends higher.

However, it is also important to mention that Pioneer Natural Resources plans to spend within cash flows by 2018 at an oil price of $55 per barrel. If this holds true, the company's leverage will remain moderate; even with investments that are in sync with operating cash flows, the company will be able to deliver strong production growth.

For fiscal 2017, Pioneer Natural Resources is expecting production growth in the range of 13% to 17%. If oil does trend above $55 per barrel, the company will accelerate investments. Even at 15% production growth, Pioneer Natural Resources is well positioned to trend higher from a stock upside perspective given the fact that the company commands investment grade rating, and there are minimal concerns from a credit perspective.

With oil prices firm, Pioneer Natural Resources already has plans to increase its horizontal rig count from 12 to 17 in the Northern Spraberry in the second half of the year. While the increase in capital expenditure is minimal ($100 million), I see production growth targets as the key factor that will trigger stock upside.

From a fundamental perspective, another major long-term positive for Pioneer Natural Resources is the fact that the company has high oil exposure. For fiscal 2016, the company's production is likely to be 58% oil weighted, and the company expects it to increase to 65% by 2020. With quality acreage and oil price trend likely to remain on the upside, I see this factor as bullish.

Another fundamental factor that is worth mentioning is that Pioneer Natural Resources has been successful in lowering the production cost per barrel of oil equivalent on a consistent basis. From production cost per BOE of $11.19 in the second quarter of 2015, the production cost declined to $8.36 per BOE in the second quarter this year. The maintenance cost (among the cost components) decline has been due to centralization of activities, and broad cost reduction initiatives have helped in lowering cost. Overall, this is positive as oil trends higher as EBITDA margin expansion can be expected in the coming quarters.

Just to put things into perspective for the second quarter, Pioneer Natural Resources reported realized oil price (excluding hedges) of $29.95 per barrel and a cash margin of $20.59 per barrel. In the coming quarters, cash margin will expand and if oil sustains at $50 per barrel or higher, the outlook is robust for fiscal 2017.

In conclusion, Pioneer Natural Resources has been a value creator in the past, and I expect the company to remain a value creator in the coming years. With a robust drilling inventory and approximately nine years of proved reserves to production, there are good times ahead as oil trends higher.

Further, management efficiency has been proved through cost controls in challenging times along with prudent investments. Overall, the stock is worth holding for the next three to five years.

Disclosure: No positions in the stock.

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This article first appeared on GuruFocus.


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