Pioneer Natural Resources Is Too Pricey

| About: Pioneer Natural (PXD)

Summary

Pioneer’s stock had a great run since 2009.

The company has experienced strong production growth.

However, the stock is currently rich in value and due for a pullback.

I would consider it a buy at a better valuation, since strong production growth is expected to continue.

Pioneer Natural Resources (NYSE:PXD) is an oil and gas exploration/production company with operations in the Spraberry Field in West Texas and the Eagle Ford Shale in Southern Texas. The company uses hydraulic fracturing (fracking) in its drilling and completion projects. Pioneer has increased its acreage over the past three years, with an investment of over $365 million. Overall, I think that Pioneer will perform well over the long term, but the stock is currently too rich in value. I would rather wait for a pullback and a better valuation level before buying the stock.

Valuation Analysis

First, Pioneer's price-to-cash flow is currently 12.4, which is 134% higher than the industry average of 5.3. This is also higher than the average P/CF for the S&P 500, which is currently 10.9. Pioneer's 5-year average P/CF was 8.7. I would rather see Pioneer's P/CF closer to, or preferably below its 5-year average. If investors give Pioneer a higher valuation than the industry average, then a P/CF figure closer to its 5-year average would be reasonable. Pioneer is priced more than twice as high as the industry in terms of cash. The oil and gas industry is cash-intensive, so this ratio holds a lot of weight for the valuation of energy companies.

Another important valuation metric for energy-related companies is EV/EBITDA. Pioneer is trading with an EV/EBITDA of 16.4. This is much higher than many of its competitors. For example, Apache Corporation (NYSE:APA) is trading with an EV/EBITDA of only 3.5. Chesapeake Energy Corporation (NYSE:CHK) has an EV/EBITDA of only 5.5. Even the large oil majors are trading with much lower ratios. Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP plc (NYSE:BP) have EV/EBITDA ratios of 7.03, 5.4, and 5.9 respectively. These are all significantly lower, which shows that Pioneer is overvalued as compared to its competitors in terms of enterprise value divided by EBITDA.

To look deeper, I compared the EV/Daily production, or EV/BOE/D. This ratio takes the enterprise value divided by barrels of oil equivalent per day. Pioneer's EV/BOE/D is 167,492 when using 2013's BOE/D of 161,456. Chesapeake and Apache have much lower ratios of 44,716 and 51,932 respectively. Chesapeake produced 670,000 barrels per day, while Apache produced 761,000 barrels per day. Pioneer's competitors have production that is over 4 times higher. This is a large disconnect and the reason for Pioneer's higher valuation when taking production into account. Pioneer is expected to double its 2013 production by 2018, but this would amount to about 323,000 barrels per day, which still falls below its competitors' 2013 daily production levels.

Conclusion

What makes Pioneer attractive is its strong expected annual growth. The company is expected to increase production by 14% to 19% in 2014. The compound annual growth rate is expected to be 16% to 21%. This is a strong growth rate that should catalyze the stock for the long term. Dr. DeSantis did an in-depth analysis of Pioneer's growth potential, which can be used as a reference for investors. However, despite all of the great potential, I think that the stock is overbought, overvalued, and due for a pullback. I don't think that Pioneer's stock will perform as well in 2014 as it did in recent years. On the other hand, I think that a dip in price will create a more attractive entry point for a long-term position in the stock. I will wait to see a better valuation in the future.

Disclosure: I 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.