Like all oil & gas stocks, Pioneer Natural Resources (PXD, Financial) has witnessed strong correction from peak levels of 2014. From a peak of $233.07, the stock has corrected by 31% to current levels of $160.81. I believe that the current levels are attractive for gradual accumulation of the stock.
I emphasize on gradual accumulation as the global economic outlook is uncertain and further decline in oil prices can result in more correction. However, the company specific fundamental factors are strong and should take the stock higher once oil price recover.
Starting with the valuations, Pioneer Natural Resources is currently trading at an EV/EBITDA of 11.09, and these are attractive valuations considering the expected growth trajectory for the stock over the next few years. According to analyst estimates, Pioneer Natural Resources is expected to witness earnings growth at a CAGR of 17.25% over the next five years. With these growth projections, the current valuations are attractive from a long-term perspective. However, as mentioned earlier, the stock should be accumulated gradually.
Coming to the company’s fundamentals and the reasons to buy Pioneer Natural Resources, the company’s revised growth strategy is in-line with difficult market conditions and the revised strategy should help the company sustain even in relatively difficult times.
The company’s recent equity offering of $1 billion coupled with the expected sale of the company’s Eagle Ford Shale midstream business, is expected to allow Pioneer Natural Resources to develop its assets in a $70 to $80 oil price environment. This estimate from the company’s latest presentation is a big positive as it means that the company’s robust capital expenditure will continue in 2015 even if oil prices remain in the above range.
The risk will be when oil prices drop below $70 per barrel and sustain at those levels for a prolonged period. That will happen only with a steep decline in global economic activity in 2015. However, with economic resilience in U.S. and strong economic growth in India, I expect global economy growth to remain weak, but not very weak in 2015.
According to the company’s the current equity offering coupled with the potential sae of the midstream business will also allow Pioneer Natural Resources to provide an annual production growth in the range of 16% to 21% through 2016. The company expects returns from the producing assets to range 40% to 80% on a pre-tax basis. This is certainly attractive economics for Pioneer Natural Resources in difficult market conditions and if the production growth of above 15% is sustained over the next two years, the stock is likely to move meaningfully higher.
I must add here that the company’s game changing asset Spraberry/Wolfcamp will remain the asset in focus over the next two years as well. The potential of the asset can be understood from the fact that Pioneer Natural Resources has increased the recoverable resources potential from the asset to 9.6bboe from 3.1bboe in the last three years. Further, the production from the asset has increased from 45mboepd in 2011 to current levels of 103boepd. With focus on this asset, the company’s growth trajectory will remain strong.
The Spraberry/Wolfcamp asset already has an inventory of more than 20,000 horizontal drilling locations and as these locations are drilled over the next few years, a production growth in excess of 15% is very likely. Further, this production growth can take place in an environment where oil prices remain above $70. Therefore, the economics of the asset is very attractive and should take Pioneer Natural Resources significantly higher once oil price also start to trend higher.
In terms of reserves, Pioneer Natural Resources had proved reserves of 845mmboe as of FY13 with 432mmboe of proved reserves in Spraberry/Wolfcamp. In FY13 the company added 211% of the full year’s production to reserves and I believe that strong reserve replacement will also continue over the next few years considering the huge drilling inventory. Pioneer Natural Resources also has a positive mix of reserves with 40% oil, 22% natural gas liquids and 38% gas. A higher concentration of oil & NGL means higher EBITDA margins.
In conclusion, Pioneer Natural Resources has excellent assets and the company has an excellent growth strategy that cuts cost and makes production viable even when oil prices are lower. The company’s capital expenditure will allow for strong growth in terms of production and cash flow in the coming years and investors can consider the stock at current levels.
