Liquidity And Hedging: Reasons To Be Bullish On Pioneer Natural Resources

| About: Pioneer Natural (PXD)
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Summary

Pioneer Natural Resources is likely to generate $1 billion in cash from the potential mid-stream asset sale.

85% of the company's 2015 production is hedged at $73.54 per barrel and this will ensure that OCF remains robust.

Current financial flexibility allows for robust asset development in 2015 even at current oil prices.

While oil prices continue to slide, I am more focused on finding attractive value opportunities than guessing the bottom for crude. Pioneer Natural Resources (NYSE:PXD) is one attractive opportunity that can be considered for gradual accumulation. This article looks at some of the positive factors that make me bullish on Pioneer Natural Resources.

The first point is from a liquidity perspective that makes Pioneer Natural Resources well positioned in challenging market conditions.

As of September 2014, Pioneer Natural Resources had a cash position of $550 million

On November 5, 2014, Pioneer Natural Resources mopped up $1 billion through public offering of 5,750,000 shares

Pioneer Natural Resources is scouting for buyers for its Eagle Ford mid-stream business. Pioneer Natural Resources expects free cash flow from the mid-stream business to be $100 million for 2015 (company's 50.1% stake).

According to this article from Bloomberg, pipeline and processing assets generally trade at 9 to 12 times cash flow. Pioneer Natural Resources is potentially looking at further cash infusion of $1 billion through this asset sale.

The company is already looking for buyers and I believe that the asset sale can be completed before the first quarter of 2015. Therefore, the company's total cash position (including the asset sale) comes to $2.5 billion. Considering a long-term debt of $2.6 billion, the net debt would therefore be $100 million once the asset sale is completed.

Therefore, from a financial perspective, Pioneer Natural Resources is strongly placed to continue asset development activities even if oil prices remain at current levels. While I believe that the company's production growth will decline, the assets can be developed for monetization once oil prices start moving higher beyond 2015.

While the liquidity position is a big positive and it ensures that Pioneer Natural Resources comfortably navigates the current crisis, investors also need to be realistic in terms of the expectation related to production and cash flow growth.

According to the company's December 2014 presentation -

$1 B equity offering in early November, combined with the planned sale of Pioneer's Eagle Ford Shale Midstream business, is expected to allow Pioneer to prudently develop its assets in a $70 to $80 oil price environment and provide consistent annual production growth of 16% to 21% through 2016 at attractive returns ranging from 40% to 80% before tax.

With WTI and Brent trading at $56.4 and $61.3 respectively, I believe that Pioneer Natural Resources will cut its production growth forecast for the coming year. However, from a cash flow perspective, the outlook remains fairly robust with 85% of 2015 production volumes hedged at $73.54 per barrel.

With Pioneer Natural Resources average production cost of $13.17 per barrel in 3Q14; I believe that the company's operating cash flow will remain robust even if it does not reach FY14 annualized operating cash flows of $2.4 billion (at an average oil price of $92.94 per barrel).

While the hedged price of $73.54 is 21% lower than the average oil sales price of $92.94 per barrel for the first nine months of 2014, even if the operating cash flow declines by 30% to 40%, Pioneer Natural Resources will still be generating an OCF of around $1.5 billion for 2015. This will cover for the company's capital expenditure even if the liquidity position of $2.5 billion remains unutilized.

Therefore, there are strong reasons to be bullish on Pioneer Natural Resources with a 2-3 year time horizon. With the company having ample cash and good hedged positions, robust cash flow will continue to drive strong investments.

My recommendation is to accumulate Pioneer Natural Resources gradually and I believe that this stock can be among the outperformers when oil prices start recovering.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.