Several energy stocks are currently attractive amidst the carnage in the energy sector, such as Pioneer Natural Resources (PXD, Financial), a company operating primarily in the Permian Basin in Western Texas.
In the period before the steep decline in oil and gas prices, Pioneer was a big value creator and the stock peaked at $233 on July 24, 2014. The subsequent crash in oil prices resulted in the stock plunging by 54% to lows of $107 by the end of this August. The stock has gained some strength and surged by 36% to current levels of $146.
Pioneer Natural Resources bottomed out at $107 and the stock is still good for long-term accumulation. For investors who are looking at quality energy stocks with a time horizon of five years, Pioneer can be considered.Â
In these times, the first factor to analyze is the company’s financials, balance sheet and cash flow, in particular.
Pioneer had debt of $2.7 billion as of December 2014 and the company’s debt remains at $2.7 billion as of September. The company has done very well in managing investments within operating cash flow limits and cash buffer.
Pioneer has a $581 million cash buffer as of 3Q15 and the company still has an undrawn revolving credit facility of $1.5 billion. Therefore, a strong liquidity position of $2.1 billion still exists, and the undrawn credit facility will be used when industry shows early signs of improvement. In other words, I expect no increase in debt until industry conditions improve.
Pioneer had net debt to capitalization of 19% as of September and this implies high financial flexibility. This is an important point as the company has huge resource potential that will be exploited once oil prices recover. That would need a mix of debt and equity to develop and the company has that flexibility.
Another aspect from a financial perspective is Pioneer has some excellent hedged positions. For the remainder of 2015, 90% of the company’s oil production is hedged with 85% of 2016 estimated oil production also hedged. While cash flows are certain to take a hit, hedged positions ensure that cash flow still remains healthy.
From a production growth perspective, Pioneer expects 15% annual production growth during the period 2016 to 2018, with oil production growth likely to be in excess of 20%. These are bullish estimates considering the fact that oil has remained weak through 2015 and oil is unlikely to stage robust recovery in 2016.
The positive factor is that lower cash flows due to weakness in oil price will be offset to some extent by higher production. In addition, 4Q15 production is likely to be 52% oil, while the production estimate for 2018 is likely to be 60% oil. Therefore, I expect gradual EBITDA margin expansion on the back of recovering oil price coupled with higher share of oil in total production.
I expect EBITDA margin to remain robust even when looking from a cost perspective. As of 3Q15, the company’s production cost per barrel of oil equivalent was $11.62 and this has declined from $13.17 in 3Q14. While the production cost in 3Q15 increased as compared to 2Q15, the increase was due to the sale of the Eagle Ford Shale midstream business.
In conclusion, Pioneer Natural Resources can be considered at current levels with a long-term investment horizon. The stock has trended higher in the last two months and the stock has bottomed out at $107 in August. With prized assets and a huge resources remaining to be developed, Pioneer has a long way ahead and it is likely to be rewarding for shareholders.
