Seeking Alpha

Pioneer Positions For 2020s Scenarios

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About: Pioneer Natural Resources Company (PXD), Includes: ARMCO, CVX, EOG, OXY, XOM
by: Jennifer Warren
Jennifer Warren
Research analyst, commodities, macro, natural resources
Summary

Pioneer's leadership is preparing for a number of scenarios as a top U.S. shale player.

Recent performance and shareholders as a priority are good signs.

In spite of the Permian's growth expected to slow, Pioneer's Midland Basin position and top well performance offer confidence in a number of pricing scenarios.

Shale producers are maturing and having to play to their strengths while balancing investor expectations.

In Pioneer Natural Resources (NYSE:PXD) latest earnings report to investors, a couple of items caught my attention. Of course, CEO Scott Sheffield is delivering on his intentions to balance production and investor performance. Pioneer is among the top Texas Permian producers with a concentrated asset portfolio in the Midland Basin which allows for this. Plus, Sheffield understands that the days of U.S. shale’s adolescence is over. The other item that caught my attention was the effort to highlight their environmental, social, and governance (ESG) record and efforts.

With the upcoming presidential election, presenting their “license to operate” to candidates and policymakers is of strategic communications importance. However, the industry has yet to find and frame the message of the balance between the demand for their product and service – oil and gas production - with its place in the energy mix and an aspiring lower-carbon world. Oil and gas will be in the mix for decades for various reasons.

About Pioneer

Sheffield expects “the Permian to slow down significantly over the next several years.” He’s lowered Pioneer’s production targets (from the recent past) to adhere to “a free cash flow model that public independents are adopting.” However, they did indicate higher production guidance for the third quarter.

Pioneer’s competitive position is still impressive in a number of oil price scenarios.

Shale extraction is about geology and economics, and therefore well performance. When asked about drivers of well performance going forward, Joey Hall, EVP of Permian Operations, noted the following in call:

I think it's obvious that we're reaching a point in time where the opportunity to improve well performance is not what it was compared to two or three years ago… we're generating economics, not just trying to produce oil.

…Looking at those curves, I don't think anybody expects that we're going to continue to see that kind of improvement year-over-year. It'll eventually flatten out until new technology, EOR or some other opportunity presents itself, all of which are things that Pioneer is looking into.

Furthermore, Sheffield suggests that OPEC need not worry about U.S. shale. The Permian Basin has been the largest driver of U.S. oil production growth. It follows that a Permian production slowdown would help stiffen prices, in the absence of an economic slowdown or recession. As Saudi Arabia pushes for higher prices ahead of their Aramco IPO (ARMCO) slated for Dec. 11, hopefully they do not overshoot, given the uncertainties of demand in the current economic climate. The Saudis intend to encourage other producers and overproducers to adhere to current production cuts of 1.2 million rather than setting more new cuts.

“If the Saudis were to succeed in getting overproducing countries such as Iraq, Nigeria, non-OPEC member Kazakhstan and a few others, to comply with the agreement, the result would bring about an effective cut of 500,000 barrels a day,” according to Saudi oil advisers, the Wall Street Journal writes.

In the latest report by the cartel, demand for OPEC crude is expected to fall by 1.1 million barrels a day next year compared to 2019.

ESG Leading

Permian Basin producers received undesirable attention for the amount of flaring occurring. Pioneer wants to encourage Permian producers to adopt reductions of 2% or below relative to their current practices. Sheffield is rightly steering his peers in the proper direction.

The gas flaring is a result of increased oil and gas production since Permian producers began drilling horizontally and hydraulic fracturing in earnest in 2013.

(Chart from Bloomberg article)

On the ESG front, Pioneer notes a few highlights related to its environmental record:

• 40% reduction in methane intensity;

• 38% reduction in greenhouse gas emissions intensity from 2016 to 2018.

In general, Pioneer’s stock has performed better than some independent peers, such as Occidental Petroleum (OXY) and EOG Resources (EOG), the exception being the Majors Exxon Mobil (XOM) and Chevron (CVX) of late.

Pioneer has course corrected from its ambitious production goals of the recent past. CEO Sheffield is a thoughtful steward of Pioneer's and the industry he represents. Focusing on lean manufacturing, positioning for big picture strategy and rewarding shareholders with a dividend helps in attracting and retaining investors.

Disclosure: I/we 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.