Pioneer Natural Resources Grows, Making Intelligent Moves

Summary

  • Pioneer Natural Resources has recently made intelligent moves to significantly improve its portfolio.
  • The acquisition allows the company to use synergies to take advantage of low oil prices to improve its cash flow.
  • Low oil prices remain a risk, but as it moves towards a 10% FCF yield, it can generate significant long-term shareholder rewards.
  • I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Pioneer Natural Resources (NYSE: NYSE:PXD) is one of the largest hydrocarbon exploration companies in the United States. The company has a market capitalization of near $14 billion and recently announced that it's making a major $7.6 billion stock acquisition. That's a more than 50% increase in size for the company, and an all-stock acquisition.

Pioneer Natural Resources Transaction Overview

The new transaction for Pioneer Natural Resources is its largest transaction in its history.

Pioneer Natural Resources Transaction - Pioneer Natural Resources Investor Presentation

Pioneer Natural Resources is focused on maintaining its strong balance sheet, with 2021E Net Debt / EBITDAX of ~1.1x. The company is planning to reduce this to <0.75x. The company's net debt would come with ~930 thousand Permian acres with no federal land. That acreage is centered in states with strong support of the industry and the company.

The company's quality inventory will support FCF, which we'll discuss in more detail later. The company is focused on the benefits of size and scale with $325 million in annual synergies. This aggregation of things is something we expect to increase dramatically in the oil industry in the coming months and years, although Pioneer Natural Resources is one of the first to move forward.

Overall, the acquisition comes at a slight premium that the market already engaged in to effectively close today. At this point it's a simple all-stock acquisition.

Pioneer Natural Resources Acquisition - Pioneer Natural Resources Investor Presentation

Pioneer Natural Resources is making an all stock acquisition at a $7.6 billion transaction value. The pro forma share count will be 216 million pointing to a share valuation of $18 billion. The company's synergies would improve and its FCF would improve. Long-term, the company expects massive synergies. The company sees a quick closing in 1Q 2021.

Overall, this is a simple transaction with valuable synergies.

Pioneer Natural Resources Core Merged Assets

Pioneer Natural Resources will have valuable merged assets.

Pioneer Natural Resources Merged Assets - Pioneer Natural Resources Investor Presentation

The company company will be significantly larger, with its natural gas production pushing it towards more than 600 thousand barrels / day in production. In 2Q 2020, that was 558 thousand barrels / day in production as a result of handling short-term curtailments. The company's are incredibly significant with nearly 1 million barrels / day in production.

The combined company will have debt at roughly $5 billion and a valuable market capitalization. The merged top-tier assets in one of the highest potential oil fields in the world means not only the potential for significant long-term cash flow, it also means that the company is an incredibly interesting acquisition target.

That's something worth paying close attention to.

Pioneer Natural Resources FCF Profile

The company current offers a respectable FCF profile and dividend >2.5%. However, it sees itself improving significantly from there.

Pioneer Natural Resources FCF - Pioneer Natural Resources Investor Presentation

Pioneer Natural Resources anticipates, despite the oil price issues, FCF of $500 million in 2020. In 2021 alone, that could move to over $1 billion from the combined companies. That's due to synergies despite the combined company coming with only a 50% size increase. That's with partial synergies for the company initially.

Going forward, that's expected to become much more significant, along with a recovery in oil prices. The company will see its FCF going towards $2 billion with a massive near 10% FCF yield. That'll help support much more significant shareholder rewards. And it's a strong return for those who are willing to invest now.

Pioneer Natural Resources Strong Financial Positioning

Pioneer Natural Resources has continued to focus on incredibly strong financial positioning.

Pioneer Natural Resources Debt - Pioneer Natural Resources Investor Presentation

Pioneer Natural Resources has Net Debt / EBITDAX that's unparalleled among its competitors. The company's Net Debit / EBITDAX is ~1. The company's peer leading debt is incredibly abnormal for a market collapse and it's something worth paying close attention to. The company's peer leading debt and stock acquisition means it actually has much more room to expand.

Pioneer Natural Resources Maturities - Pioneer Natural Resources Investor Presentation

More so, it makes the company, financially an incredibly interesting acquisition for any major. The company's low debt also means it can choose to expand that debt for additional bolt-on acquisitions. At the same time, low interest rates are benefitting the companies and Parsley has an average interest rate of ~5%.

That will save the company ~$75 million annually. At the same time a ~2% interest rate is minimal and supports potentially additional borrowings. Pioneer Natural Resources is on the path, in the next several years, of becoming a cash flow giant. However, it's worth highlighting, even if the company is delayed by low oil prices from that point, it's still market leading.

Specifically, the company in a good market performs great, but in a bad market still performs better than the others. That's something that not only makes the company a great investment, it makes it an interesting acquisition target.

Pioneer Natural Resources Shareholder Returns

Putting all of this together, we expect Pioneer Natural Resources to generate long-term shareholder returns.

Pioneer Natural Resources Shareholder Return - Pioneer Natural Resources Investor Presentation

Pioneer Natural Resources is working to improve itself significantly. The company has made an impressive acquisition and is focused on returning capital to shareholders. The company has significantly improved its over FCF picture and should be able to continue improving its FCF going forward. Those improvements point to massive shareholder returns.

The company has an impressive and improving asset base. Additionally, it has a highly repeatable exploration program. That exploration program points to a long-term 10% annual FCF yield. That's a strong yield, not only for the current expensive market, but any market. Those shareholder returns highlight how the company is worth investing in for the long run.

Pioneer Natural Resources Risk

Pioneer Natural Resources' risk is the same risk that all other oil companies face. It's the risk of a long-term continued decline in oil prices. The company has a strong path to continued massive FCF, however, with capital spending and dividends coverable at the mid-$30s WTI. That's well below where current prices are.

However, it also means that the company is susceptible to a drop in prices. We expect it to continue performing going into 2021-2022, and oil prices to recover, but that remains to be seen.

Conclusion

Pioneer Natural Resources has an impressive portfolio of assets. Its recent acquisition has the ability to generate long-term shareholder rewards, doubling the company's FCF with a 50% dilution. That's a massive dilution, but it also allows the company to maintain its incredibly exciting financial position. The company's FCF yield will push to 10%.

At the same time, the company has the ability to generate long-term synergies from the acquisition. Additionally it can lower its debt interest to 2%, saving interest expenses. The company can borrow additional cash easily at current prices, should it be required. That means it could make other bolt on low cost acquisition.

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