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Much has been made lately of the ability of the United States to become energy independent. Thanks to drilling in areas like the Bakken and Eagle Ford Oil Formations, the U.S. is beginning to produce reserves of oil and natural gas like never before. If early estimates from Pioneer Natural Resources (PXD) are to be believed, that production is about to grow in a big way.

In October, Pioneer said that it believes that Texas' Spraberry/Wolfcamp oil field in the Permian Basin contains as much as 50 billion barrels of oil which would make it the second largest oil field in the world. There are a number of companies like Occidental Petroleum (OXY) and Apache (APA) with a presence in the area that stand to benefit, but the company with the greatest exposure that could stand to gain the most could end up being Pioneer.

Pioneer has already ramped up its production in recent years (from 120,000 barrels/day in 2011 to an estimated 180,000 barrels/day in 2013) and is setting up to maximize the potential from Spraberry/Wolfcamp. With its 900,000 gross acre position, Pioneer operates approximately 35,000 drilling locations in the region and plans to add another 400 in 2013. The company also has strategic alliances in place with companies like Sinochem Petroleum and Reliance Industries (OTC:RLNIY) to augment the potential return on exploration.

Pioneer's potential depends largely on whether or not you think the potential of Spraberry/Wolfcamp is the real deal. If Pioneer is able to execute on its strategy and estimates of the amount of energy that can be pulled out of the basin are accurate then PXD is a buy and there's no reason to think that the share price can't rise significantly over the next 12 months.

But there are reasons for caution as well. The estimates of 50 billion barrels of recoverable oil could prove to be inaccurate. If drillers find that estimates came in too high or there is less "recoverable" oil than previously thought, Pioneer's presence in the region becomes less valuable. Additionally, it could take a significant investment to pull all of that oil out of the ground.

From a standpoint of fundamentals, the stock has seen its share price double year-to-date and currently sits at an expensive multiple of 59 times earnings. Q3 earnings are scheduled for November 4th and that could be our next indication of management's belief of the region's potential. Analysts have been raising estimates lately and a beat on earnings could keep the stock pushing higher.

Conclusion

I think the Permian Basin is for real. Even if the 50 billion barrel estimate is overblown, Spraberry/Wolfcamp will be the largest oil field in the country and it still makes sense to invest in the company that has one of the largest positions in the region. Other interested companies have begun supporting the veracity of that estimate so that risk may be minimized.

The P/E ratio is a bit rich but the stock warrants a premium based on revenue and earnings potential. The Permian Basin as a whole is worth watching and investors should closely observe the results of drilling as that will drive Pioneer's value going forward.

Source: Pioneer And The Permian Basin Potential