There are times in the history of an industry, which are characterized by a pessimist sentiment. Both energy crises are a clear example, when politics gave economics a powerful strike. Cars lined up for blocks with no end in the hopes of pumping a few gallons. In the first crisis, Iran’s Islamic Revolution expropriated oil reserves and kicked out foreign investors. During the second crisis, a new chapter of the Arab-Israeli conflict would lead to the withholding of oil reserves by the Arab countries.
The consequence was the same in both cases: a reduction in oil supplies. While the 1980s and 1990s transited with small upheavals for the market, the events of September 2001 unleashed a chain of events with important consequences for crude oil exploration and production. Due to the great political instability in the Middle East, new reserves turned attractive in different locations as new technology became available. That is how unconventional reserves rose to importance, and Pioneer Natural Resources (NYSE:PXD) found a very profitable opportunity.
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- PXD 15-Year Financial Data
- The intrinsic value of PXD
- Peter Lynch Chart of PXD
Offsetting Weak Performance
Referring to Pioneer Natural Resources specifically, analysts’ recommendations arrived late. When financial institutions began to upgrade ratings on the stock at the end of the last quarter of 2013, market performance was pass its zenith. Nonetheless, as performance slowed down ratings adjusted accordingly. Today, analysts rate the “Neutral,” “Hold,” “Equal Weight,” or “Market Perform.” What should be emphasize here is the unanimity about the stock’s prospects. Most important, there are no negative opinions on the stock, while target price remains above the $200 mark and $6 above current market value.
For the year of 2013, Pioneer Natural Resources reported a loss of $1 billion, where $897 million are attributable to continuing operations, while the remaining $145.4 million correspond to discontinued operations. One of the quick responses to the weak overall performance is the plan to sell Pioneer Alaska and the company’s Barnett Shale field assets. Hence, there are great expectations to see whether the performance during the first quarter of 2014 meets the goals previously sat.
Besides the declining performance, Pioneer Natural Resources announced that added proved reserves totaling 141 million barrels oil equivalent during 2013 from discoveries, extensions, improved recovery and technical revisions of previous estimates. And in order to continue with this positive trend, the Company continues to shift drilling activity in the Spraberry/Wolfcamp play in the Midland Basin of West Texas from vertical drilling to horizontal drilling. It is believed that replacing vertical drilling with horizontal drilling will enhance ultimate resource recoveries and improve rates of return per dollar invested.
Looking forward, Pioneer Natural Resources expects production to average 166,000 to 171,000 barrels of oil equivalent per day, with an average production cost of $13.50 to $15.50 per barrel of oil equivalent for the first quarter of 2014. Moreover, total expenses are calculated to be between $167 and $199 million for the same period. The information was announced to be made public by May 6. In the meantime, the company continued to move forward with its $3.0 billion capital investment for drilling operations, and an additional $285 million for the acquisition of equipment and property.
The greatest growth limiting characteristic for Pioneer Natural Resources’ business model, is the dependence on acquisitions and exploitation for growth. With troubling finances and the exposure to oil and gas price volatility, expanding will turn into a real difficulty, evidenced on the recent asset divestiture. Moreover, disappointing results from the company’s core properties in the Spraberry trend of the Permian Basin and the Eagle Ford Shale could act as a potential risk for the stock.
Currently trading at 37.24 times consensus earnings, Pioneer Natural Resources’ stock carries a 113% premium to the industry average. More, the company pays $0.04 in quarterly dividends, for an annual yield of 0.04%. Given the comparative high price, low reward and troubled business model, the gurus holding the largest positions have been dropping the stock throughout 2013. And you are recommended not to purchase the stock for a long-term investment.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.