Pioneer Natural Resources Is Making Money At Sub-$40 Oil, Lots Of Value To Be Had

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Summary

Profitable core asset base currently provides Pioneer Natural Resources with fantastic margins in the current low-price environment.

Operational efficiency improvement initiatives have led to a 30% reduction in operating costs while the average production per well has increased by 50%.

Pioneer's investment grade balance sheet and manageable long-term debt levels make PXD a nice long-term value play for an investor looking to get into the oil & gas space.

Pioneer Natural Resources (NYSE:PXD) is an independent oil & gas exploration and production company based in the U.S. Pioneer's 2016 outlook is strong, and the company's long-term growth plan and strategic short-term moves have made Pioneer a stock every long-term investor should consider, given the recent rebound in oil and the long-term view that oil prices will continue to improve in the medium to long-term.

 

Pioneer is well-positioned to ride out the current low commodity price environment due to a strong balance sheet and balanced capital expenditure program which is currently funded through 2017, meaning no incremental debt is expected to be incurred in the short-term, allowing Pioneer to further bolster its cash position and balance sheet in the short-term.

Pioneer's Assets

Pioneer's core assets include a few very interesting properties such as Spraberry/Wolfcamp in West Texas which is currently earning a significant 30% IRR on current production levels in the sub-$40 range. Other properties such as the liquid-rich shale oil field in the Eagle Ford Shale formation in South Texas, Raton gas field in southern Colorado, and the west Panhandle field in the Texas panhandle are operating at a profit, something which cannot be said for many competitors who are currently struggling with sub-$40 oil. Pioneer's assets also provide considerable reserves which further position Pioneer to take advantage of rising oil prices over the long-term.

Increasing Production

Pioneer is one of the few U.S. oil & gas companies which has included significant increases in production as part of its 2016 plan. Pioneer is projecting a 10% increase in production in 2016 while cutting its horizontal drilling activity by 50%. The impressive productivity of Pioneer's core assets appears to be understated, and the company is poised to make further improvements in productivity among its most efficient and profitable wells, as a move to further shore up its balance sheet and preserve its cash position moving forward.

 

(Source:Pioneer Natural Resources 2016 Investor Presentation)

Operational Efficiencies

Pioneer has benefited from a range of operational efficiency improvement initiatives which have contributed to a significant decline in the company's operating costs (approximately 30%), while increasing the average yield per well by approximately 50%. This increase in operational efficiencies is one of the main drivers behind the cost-reduction initiatives Pioneer has implemented which we will talk about next.

 

(Source: Pioneer Natural Resources 2016 Investor Presentation)

 

(Source: Pioneer Natural Resources 2016 Investor Presentation)

Reduction in High-Cost Production

The key reductions Pioneer has planned include:

  • Cutting the Eagle Ford Shale rig count from six rigs to 0 during Q1 2016, with two rigs released in January as announced
  • Moving from four rigs at Q4 2015 to 0 rigs by mid-2016 in its southern Wolfcamp joint venture
  • Reducing the number of rigs at its Spraberry/Wolfcamp property from 14 to 12 in Q1 for capital preservation
  • Relocating two of the Eagle Ford Shale pressure pumping fleets to the Spraberry/Wolfcamp property in 2016

These reductions in drilling in 2016, combined with reductions in capital expenditure spending on a number of vertical integration plays have reduced Pioneer's capex budget from $2.4-$2.6 Billion to $2.0-$2.2 Billion in 2016.

Investment Grade Balance Sheet

Pioneer is one of the few oil & gas companies in the U.S. which is not under serious threat of a credit downgrade, boasting strong forecasted cash flow which is expected to fully fund its capital spending program through 2017 without the need to take on additional long-term debt.

Pioneer's cash position at Q4 2015 sits at $400 Million, not including proceeds from a January 2016 equity offering of $1.6 Billion and an additional $500 Million expected to be received in mid-2016 from the sale of non-core assets in its midstream business (announced in 2015). Pioneer's pro forma net debt to estimated 2016 operating cash flow is currently 0.2 - significantly better than many other comparable companies.

Debt Position

Pioneer is increased oil production in its core asset base without having to take on incremental debt, further enhancing Pioneer's profitability in the short-term, making this company a stable bet in the current depressed oil market.

As of Q4 2015, Pioneer had a cash balance of $1.4 Billion with net debt of only $2.3 Billion (excluding proceeds from 2016 equity offering and sale of non-core assets previously mentioned), reflecting a healthy debt to cash ratio of 1.6. Pioneer's cash flow outlays spanning the next 12 years also appear to be manageable, and with further debt reductions from additional free cash flow resulting from increased operational margins, we anticipate reductions in long-term debt which are not being factored in by the market.

 

(Source: Pioneer Natural Resources 2016 Investor Presentation)

Oil Outlook

It is our opinion that the oil outlook for the rest of 2016 and 2017 is a bullish one. We expect that the current stabilization of oil prices toward a long-term average price significantly higher than current market levels is likely, and believe Pioneer is well-positioned to benefit from such a rebound much more than other companies that have not yet realized efficiency gains to the same scale of Pioneer.

Conclusion

Pioneer Natural Resources is a company which is built on solid fundamentals: a focus on operational efficiency, undertaking initiatives that bolster the balance sheet in the short-term, while making strategic long-term investments which will serve the company well in the long-run. We like Pioneer's debt position relative to its cash reserves, and believe a long-term recovery in oil prices will provide a fantastic boost to Pioneer's share price over the next five to ten years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.