Pioneer Natural Resources is a producer of oil and gas with significant positions in Texas in the Permian Basin and Eagle Ford shale. The company holds in excess of 825,000 acres in Spraberry and Wolfcamp and is the largest producer in both these regions.
The stock is currently trading at $228.9 and the stock has gone up by 158% in the last two years. The company has certainly performed well, but the valuations are stretched at this point of time.
Pioneer Natural Resources is trading at an EV/EBITDA of 18.2 and the valuation is expensive as compared to peers. Apache (APA) is currently trading at an EV/EBITDA of 4.18 and Chesapeake Energy (CHK) is trading at an EV/EBITDA of 5.24.
Even on the basis of EV/Revenue Pioneer Natural Resources is trading at levels of 9.4 as compared to 3.0 for Apache and 1.6 for Chesapeake. Therefore, Pioneer Natural Resources is certainly overvalued and a correction in the stock is likely.
With the broad markets positive, Pioneer Natural Resources has been trading higher, but the market valuations look stretched and any correction in the markets will result in a sharper correction for Pioneer Natural Resources with the stock currently having a beta of 1.79. Investors therefore need to remain cautious.
GuruFocus rates Pioneer Natural Resources 4 out of 10 in terms of financial strength and this is also lower as compared to 6 out of 10 for Apache and 7 out of 10 for Chesapeake Energy. I am not suggesting that Pioneer Natural Resources is a sell all the way. The company has just run ahead of its fundamentals and the stock needs to correct before buying the stock can be considered to be attractive.
One might argue that Pioneer Natural Resources is high growth company and therefore the valuation premium is justified. Analyst estimates suggest that Pioneer Natural Resources earnings will grow at 43% in 2014 and 26% in 2015. However, the stock still trades at an expected PEG ratio of 1.83 and the PEG ratio does suggest overvaluation. Chesapeake Energy currently trades at an expected PEG of 0.73.
Amidst the concerns related to valuations, the positive point is that Pioneer Natural Resources will continue to grow over the next five years. Investors should therefore wait for a correction to consider exposure to the stock for the long-term.
For 2014, the company has a planned drilling capital expenditure of $3 billion and these big investments will translate into a strong revenue and cash flow source in the future. A majority ($2.5 billion) of the capital expenditure will be funded by operating cash flows and therefore the pressure of the balance sheet will not be significant.
Another positive about Pioneer Natural Resources is the company’s strong reserves and resource base. As of December 2013, the company had proved reserves of 845mmboe and an additional 75bboe of resource potential. Strong production growth for Pioneer Natural Resources is therefore likely to continue with the existing reserves base.
In conclusion, Pioneer Natural Resources is certainly a good stock to consider for the long-term. The company has some great assets and reserves that will keep production strong for years to come. For now, the biggest concern is that the company has gone up just too fast and way ahead of its fair value. The risk-reward scenario is heavily tilted towards high risk and the best strategy would be to wait for a correction to consider this stock for long-term.