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The two mantras of activist investors are: (1) Leverage up to buyback stock, and, (2) Become a 'pure-play' either by selling or spinning off non-core assets. Pioneer Drilling (NYSE:PXD), a mid-cap energy E&P, has proven to be a quick study on the above points. They are at the leading edge of what companies can do to maximize capital structures and valuations.

In Sept-05, just after Hurricane Katrina, they hedged a bunch of forward production and announced a $1 billion stock buyback and plans to redeem high coupon debt. This morning they announced a $450MM increase to their current buyback, and the creation of two Master Limited Partnerships (MLPs) to exploit different long-life, low decline oils/gas fields and to take advantage of the current market interest in high-yielding investments and MLPs in particular. PXD up 7% yesterday as I wrote this post.

While some may be quick to call these moves as capital juggling instead of focusing on the underlying business, clearly yesterday's moves have financial benefit to shareholders. Famed value investor, Marty Whitman of the Third Avenue Value Funds, cites availability to low-cost capital as a competitive differentiator among stocks. The creation of MLPs, where PXD can isolate long-lived reserves and take advantage of a yield-seeking public market is a value-creating event for shareholders. That said, shareholders should note that some percentage of these holdings will also be removed from the valuation of PXD proper thereby making the co. more leveraged to other (presumably) shorter-lived and more prospective (positive or negative) production.

PXD 1-yr chart

PXD

Disclosure: Neither my clients nor I own PXD stock

Source: Pioneer Drilling: At Leading Edge of Capital Management