Seth Klarman (Trades, Portfolio) of The Baupost Group has added Pioneer Natural Resources (PXD, Financial) to his portfolio according to data reported by Guru Focus Real Time Picks.
Klarman has purchased 3,166,937 shares of Pioneer Natural Resources at an average price of $153.66. I must mention here that Klarman has 34.3% exposure to the energy sector and Antero Resources (AR, Financial) is another energy stock bought by Klarman in the recent past.
Pioneer Natural Resources Company engages in the exploration and production of oil and gas in the United States. As of December 31, 2014, the company had proved reserves of 799mmboe and proved reserves to production life of 11 years. This article will discuss the factors that make Pioneer Natural Resources attractive for the long term.
The first factor that is worth mentioning from an industry perspective is the potential bottoming out in energy prices. While the recent Greek crisis and Iran deal prospects have resulted in some decline on oil price, I believe that crude oil (BRENT) is likely to stay above $60 per barrel for FY15 and trend higher in FY16. Therefore, energy companies have discounted the worst in terms of oil prices, and I believe that the energy sector is unlikely to witness further decline in capital expenditure. At the same time, the energy sector is a value investment for the long term as oil prices are unlikely to surge. I expect gradual upside in energy prices than a big surge.
Coming to the factors specific to the company, I believe that valuation might be the most important consideration for Seth Klarman (Trades, Portfolio) buying Pioneer Natural Resources followed by the long-term potential the company’s assets hold.
Pioneer Natural Resources is trading at an EV/EBITDA valuation of 8.22 and I believe that these are cheap valuations for a company with an investment grade balance sheet, strong hedged positions through 2016 and exposure to top US fields. Further, Pioneer Natural Resources ranks 9 out of 10 in theprofitability and growth analysis in Guru Focus.
Elaborating further on the point that Pioneer Natural Resources has an investment grade balance sheet, the Eagle Ford Midstream sale is one of the key balance sheet strength trigger in the recent past. The Eagle Ford Shale Midstream business has been sold to Enterprise for a valuation of $2.15 billion with $1.15 billion expected in 3Q 2015 and the remainder over the next 12 months.
With Pioneer holding 51% stake in the asset, the company’s cash position will be boosted by $1 billion over the next 12-15 months. It is also important to mention that, as of 1Q 2015, Pioneer had a cash position of $383 million and a debt-to-capitalization of just 21%. The point I want to make is that the company’s balance sheet is excellent even in difficult times and the asset sale will ensure that the balance sheet remains strong in the coming year as well.
Investors would point out that Pioneer has a capital expenditure of $2.2 billion for FY15 and that can potentially impact the balance sheet strength. However, the company expects $1.6 billion in operating cash flow for FY15 due to strong hedged positions and the remaining capital expenditure of $600 million will be funded from existing cash position and proceeds from the asset sale. Therefore, the company’s debt is likely to remain stable even with high level of capital expenditure.
In addition, I believe that the company’s capital expenditure will remain robust in 2016 considering the fact the Pioneer is targeting 15% CAGR in production growth during the period 2016-18. The investment target for 2016 will be met by cash flow from the Midstream sale coupled with operating cash flows. However, the company has $1.5 billion in unsecured revolving credit facility to fund growth. In other words, even if the company’s investments sustain at FY15 levels, Pioneer Natural Resources can comfortably fund the investment.
Another reason for liking Pioneer is the fact that the company’s production cost per barrel of oil equivalent has been on a steady decline. This is important in a relatively low energy price environment as it helps expand the EBITDA margin. The company’s production cost has declined to $12.56/boe in 1Q 2015 as compared to $14.3/boe in 1Q 2014.
With the company expecting further cost reduction in FY15, I believe that this is a positive development from a near-term as well as long-term perspective. From a cost perspective, it is also important to mention that Pioneer added 177mmboe from drillbit at $19.65 per barrel of oil equivalent in FY14. The addition was 239% of full-year production, and I believe that the strong drillbit additions will continue in FY15 at a low cost per barrel of oil equivalent.
Pioneer Natural Resources has an excellent balance sheet, strong cash flow position, long-term quality assets and a robust growth plan even in challenging times. This makes the stock worth considering for the long-term portfolio and I believe that the stock is also trading at attractive valuations.
