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Edited by Adam Isaac

Pioneer Southwest Energy Partners L.P. (PSE) is a Delaware limited partnership, formed in June 2007 by Pioneer to own and acquire oil and gas properties within its area of operations. Pioneer Southwest Energy Partners L.P. is a subsidiary of Pioneer Natural Resources Company (NYSE:PXD). PSE mainly operates in onshore Texas, and eight districts in the southeast region of New Mexico.

In December 2011, PSE completed a public offering of 2.6 million common units for net proceeds of $72.6 million, including $76 thousand contributed by Pioneer Natural Resources GP LLC (the "General Partner"), a subsidiary of Pioneer, to maintain its 0.1 percent general partner interest. Concurrent with the 2011 Offering, Pioneer also sold 1.8 million common units for $50.5 million in total net proceeds.

Pioneer owns a 52.5 percent interest in the Partnership, including the 0.1 percent general partner interest. The partnership's lone operating division is in oil and gas producing activities. In addition, all of the partnership's properties are located inside the United States so all its revenues are derived from domestic buyers.

Financial Highlights

In its recent earnings announcement, PSE announced a net income of $65 million or $1.85 per common unit. However, these figures included unrealized gains from derivative contracts of $48 million or $1.35 per common unit. The PSE adjusted net income figures for the second quarter come out to $17 million, or $0.17 per unit. Moreover, cash flows from operations for the second quarter were $27 million.

For the second quarter, sales of oil and gas averaged 7,103 barrels oil equivalent per day (BOEPD). However, these sales figures fell short of the partnership's expected 7,400 BOEPD per day. The sales from the oil and gas sector were affected by approximately 530 BOEPD, due to lower gas prices and a third party natural gas liquid fractionation downtime and tight industry fractionation.

Strong Cash Distributions

PSE has a solid history of cash distributions and currently pays $2.08 annually to its unit holders. PSE is one of the highest dividend yield stocks in the market and, at present, offers an impressive yield of 8.30 percent. Strong cash distributions and a high dividend yield make this stock an ideal investment for a dividend stock portfolio. Meanwhile, improving natural gas prices and business conditions are sure to increase company cash flows, which may in turn prompt increases in cash distribution.

Stock Performance

Click to enlargePSE Chart

PSE data by YCharts

PSE stock closed at $24.53 on September 11, 2012. Recently, the stock price has been declining, and at the moment, the stock looks to be in oversold territory. PSE has a 52-week range between $21.34 and 31.73; at the moment, the stock is trading close to its lower limit. The firm has a market cap of about $880 million.

Basic Ratios

Pioneer Southwest Energy Partners has an EPS of $4.65 at the moment, and an attractive P/E ratio of 5.19. PSE's P/E ratio is extremely impressive at current levels as compared to the average industry P/E ratio of 28.1. However, the stock currently seems a little expensive, when you consider its price-to-book and price-to-sales ratios. Both of these ratios stand at 3.3, a little higher than the industry average ratios of 1.7 and 2.6, respectively.

Meanwhile, the industry as a whole is currently showing negative growth, while PSE is demonstrating an impressive revenue growth of 3.3 percent. Furthermore, PSE has an impressive three-year average EPS growth rate of more than 22 percent as compared to the industry's negative growth rate of 3.7 percent. The partnership is also currently significantly outperforming the industry in its operating margin, net margin, ROE and debt-to-equity ratio.

PSE

Industry

Operating Margin

62.9

27.4

Net Profit Margin

61.9

15.1

ROE TTM

82.1

9.9

Debt to Equity Ratio

0.3

1.0

Data taken from Morningstar.com

Peer Analysis

Relevant companies with similar operations include Linn Energy LLC (NASDAQ:LINE), Concho Resources Inc (NYSE:CXO), BreitBurn Energy Partners LP (NASDAQ:BBEP) and Legacy Reserves LP (NASDAQ:LGCY).

PSE

Linn Energy

Concho Resources

BreitBurn

Legacy Reserves

Operating Margin

62.90%

50.50%

62.20%

39.60%

19.80%

Net Profit Margin

61.90%

36.70%

33.30%

31.10%

45.70%

ROE TTM

82.10%

24.70%

20.60%

14.00%

35.70%

Debt to Equity Ratio

0.3

1.5

0.8

0.5

0.8

P/E Ratio

5.19

8.4

15.6

6.6

8.2

P/B Ratio

3.3

1.9

2.9

0.9

2.5

P/S Ratio

3.3

3.1

5.2

2.1

3.8

EPS Growth

22.10%

-29.60%

8.70%

-34.20%

-31.40%

Data taken from Morningstar.com

It is evident from the comparison that PSE is ahead of all its competitors on nearly every metric. In the whole group, only Concho Resources also has positive earnings growth, which is still lower than that of PSE. Though the P/B ratio does make Pioneer seem somewhat expensive compared to its peers, all the other metrics show PSE as a great investment.

Summary

Pioneer Southwest Energy Partners has a strong business model, and has thereby been an industry leader on most of the metrics, as made evident by the ratio analysis. Moreover, the stock is trading at an attractive price and offers a solid dividend yield. I expect the market to correct the mis-pricing soon, causing PSE prices to rise. Pioneer had a bad quarter due to low natural gas prices, third-party fractionation downtime, and tight industry fractionation.

Nevertheless, I expect the firm to meet its sales targets for the third quarter and bring in significantly improved revenues, along with improved cash flows. Pioneer certainly has the potential to yield an impressive total return for its investors.

Source: How Safe Is Pioneer Southwest's Dividend?