Pioneer Natural Resources (NYSE: PXD) is a petroleum, natural gas, and natural gas liquids exploration and production company that operates out of Texas. The company was originally created through a merger in 1997 and has grown to a $25 billion company that does not offer a dividend yield. That makes the company one of the few major oil companies that does not offer a dividend.
Pioneer Natural Resources stock performance shows how well run the company is. The company's stock price has fallen from a pre-crash peak of $230 per share down to current prices of just over $150, a drop of 35%. At its lows, the company's stock price was at $115, a drop of almost 50%.
Yet even with its devastating falls in stock price, Pioneer Natural Resources stock was in line with its more stalwart peers. Royal Dutch Shell (NYSE: RDS.A) saw its stock price drop from a pre-crash high of just over $80 down to lows of just under $40. Chevron saw its stock price drop from a high of just over $130 to crash lows of just under $70.
While a significant drop, that means Pioneer Natural Resources crash low of -50% was in-line with the drops experienced at the lows of Royal Dutch Shell and only slightly worse than the drop experienced by Chevron. That means investors are valuing Pioneer Natural Resources moat in line with that of Chevron and Royal Dutch Shell in terms of long-term potential.
Pioneer Natural Resources Overview
Now that we have an introduction to Pioneer Natural Resources along with its stock price movement and the perceived valuation of the moat, let us talk in some more detail about the company's operations.
The above graphic provides an overview of Pioneer Natural Resources and its operations. The company's enterprise value is approximately $25 billion and the company plans $2.0 billion of 2016 capex with $1.8 billion in the Permian. This capex is expected to lead to >10% production growth in 2016 which means the capex is accretive to the company's enterprise value.
The company's Q4 2015 production was 215,000 barrels per day which amounts to 78.53 million barrels of annual production. That leads to an impressive potential for profits. Should oil prices recover by $50 per barrel to $90 per barrel, still almost 20% below pre-crash highs, that would mean an additional $3.5 billion of annual profits.
Spraberry / Wolfcamp Gross Production By Operator - Pioneer Natural Resources Investor Presentation
The company's strong balance sheet is investment grade and the company's cash flow allows it to have the capital program funded through 2017 without any incremental debt. At the same time, the company is the largest producer by far in the Spraberry/Wolfcamp region, 250% its nearest competitor Apache Corporation (NYSE: APA).
Pioneer Natural Resources strong balance sheet and expansion plan coupled with its dominant market position in its regions of operation mean that the company well valued compared to its competitors. At the same time, this provides an overview of why Pioneer Natural Resources is valued with a strong moat.
Now that we have an overview of Pioneer Natural Resources, it is now time to talk about the company's 2016 plan.
Pioneer Natural Resources is reducing its horizontal drilling activity by 50% from before the crash. At the same time, the company is still forecasting 2016 production growth of more than 10%. The company still forecasts $2 billion of production that amounts to a respectable portion of its market cap. With the lows oil prices have experienced, I would be interested in the company acquiring the troubling assets of its competitors.
As we have already stated, the company reduced its horizontal drilling activity from 24 rigs to 12 rigs including completely removing 6 rigs operating in the Eagle Ford. The company continues planning $2.0 billion of drilling for 2016. At the same time, the company's derivatives will help protect the company's 2016 cash flow.
The company's 2016 derivative coverage is 85% for oil and 70% for natural gas which drops down to 50% and 25% respectively in 2017. This significant dropdown means that should the current commodity crash continue it will significantly hurt the earnings potential of Pioneer Natural Resources even with its strong production growth.
However, the company's real power comes from its balance sheet. The company's current cash pile is a relatively minimal $0.4 billion. However, the company's January 2016 equity offering earned it $1.6 billion which while dilutive towards shareholders means the company now has enough money to cover its 2016 capex spending.
At the same time, the company's sale of its Eagle Ford midstream business in 2015 will provide the company with another $0.5 billion of cash this year. Lastly, the company's 2016 net debt to operating cash flow of 0.2x means the company's balance sheet is incredibly strong and its debt does not represent a significant issue it needs to handle.
Pioneer Natural Resources Pricing Sensitivity - Pioneer Natural Resources Investor Presentation
The follow two graphics will provide an overview of the company's plan. The above graphic shows the company's sensitivity to forward commodity prices. As can be seen the company's downside is heavily limited towards future drops due to derivatives. Yet more importantly, this production is based of $36/barrel oil and $2.35/MCF natural gas, prices that have recovered significantly.
Pioneer Natural Resources Production History - Pioneer Natural Resources Investor Presentation
This second graphic provides an overview of the company's production increases. The company's production is increasingly rapidly and becoming more heavily weighted towards oil. The company's 2014 production is 182,000 barrels per day of which 48% is oil. The company's late 2016 production is expected to increase by 25% or more compared to 2014 of which 56% will be oil.
Now that we have an overview of the company along with a detailed outlook towards its 2016 plan, it is now time to talk about the company's liquidity position. We have already touched on the company's strong financial potential, but it is time to cover this now with additional details.
Pioneer Natural Resources Debt and Cash - Pioneer Natural Resources Investor Presentation
The company's net debt reflecting its cash balance is $2.3 billion. However, this debt excludes $1.6 billion of proceeds from its 2016 equity offering along with an additional $0.5 billion from the company's 2015 sale of the Eagle Ford Shale midstream business. This amounts to a total cash pile of approximately $2.1 billion meaning when all is said and done, the company's debt is approximately $0.2 billion.
The company also issued a total of $1 billion 2021 3.45% senior notes and 2026 4.45% senior notes that allow the company to fund its 2016 and 2017 debt maturities. The weighted cost of this debt is 3.95%, incredibly low compared to most other oil companies that have had a difficult time recently.
Pioneer Natural Resources Drilling Costs - Pioneer Natural Resources Investor Presentation
At the same time, the above graphic shows how the company's costs per perforated lateral foot have been decreasing significantly with a 30% decrease from late 2014 to the end of 2015. These significant costs allow the company to continue rapid exploration with minimal costs that should help its long-term potential.
Pioneer Natural Resources Cost Per Barrel - Pioneer Natural Resources Investor Presentation
Lastly, the above graphic shows how low the company has been keeping its production costs per barrel. Since late 2014, the company's production costs have dropped from $13.61 to $11.02 per barrel mainly due to significant drops in the company's Production & Ad Valorem Taxes. At the same time, however, the company's transportation costs have been increasingly significantly.
These low costs point to long-term sustainably and profits for the company. Even at current oil prices the company can continue rapid exploration and production while seeing its prices go up with any recovery in oil prices. The above graphic already demonstrated the company's sensitivity to a decrease in oil prices and show how it can continue earning strong profits even if oil prices continue to drop.
Pioneer Natural Resources has had a difficult time recently with its stock price taking a significant hit. However, at the same time, the stock price is comparable to the hit taking by many majors and noticeably less than the hit taken by other oil firms of similar size.
However, unlike other major oil firms, Pioneer Natural Resources offers a minimal dividend yield that for all purposes can be assumed to be zero. That means that unlike an investor in Exxon Mobil (NYSE:XOM) focused on dividend growth, an investor in Pioneer Natural Resources is focused on capital appreciation.
As an investor, I like Pioneer Natural Resources as one of the few $25 billion dollar companies with a single focus: increasing oil production. The company's $2 billion capital budget for the year is expected to increase production by 10% meaning even at depressed valuations, this increase in production is cheaper on a market cap basis.
Beyond this, I am impressed by the company's balance sheet which after the January 2016 equity raise, albeit at lows, that provided $1.6 billion along with its $0.5 billion in cash that it is due, the company's debt pile can be seen as zero. That is also incredibly rare compared to other oil majors and places the company at the top of security.
For all interested investors, I recommend opening a position at current prices or using the current lows to expand your position. The company has shown its ability to rapidly expand without increasing debt and even at cycle lows has shown the ability to continue expansion. That should help bring investors long-term returns.
Disclosure: I am/we are long PXD, XOM.
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.