There seems to be some respite for the oil & gas industry will oil trending higher recently. Further, with speculation that oil-producing countries might soon agree on a production freeze, there is hope for further upside in oil.
In the last few months, I have been discussing energy stocks that can be long-term value creators or are trading at oversold levels. The best time to buy any sector for the long term is when sentiments are significantly depressed, and the energy sector presents that opportunity.
Pioneer Natural Resources (PXD, Financial) is another name that is worth considering for 2016 and for the long term. Pioneer needs no big introduction with the company being a major player in the Permian Basin. For year-to-date 2016, the stock has remained largely sideways even with oil moving higher. This sideways movement is a good opportunity to buy for the medium term. Further, current valuations are worth considering with an investment horizon of three to five years.
The first reason to be bullish on Pioneer is the company’s excellent liquidity buffer that makes the company fully funded for capital expenditures in the next 24 months. In other words, Pioneer would not need any additional debt or equity through 2017, and this will ensure that leverage remains in control coupled with no concerns on the equity dilution front.
To put things into perspective, the company had $400 million in cash as of fiscal year 2015 and the January equity offering has boosted the company’s cash position to $2 billion. Additionally, the company is likely to receive $500 million from the sale of the Eagle Ford Shale midstream business.
With total cash buffer of $2.5 billion, the company’s capital expenditure of $2 billion for 2016 will be covered without using incremental cash coming from operating activities during the year. An important point to note here is that Pioneer has 85% of hedged positions for oil and 70% for gas for 2016.
This is likely to protect the company’s cash flow during the year even if oil prices show no meaningful recovery, and the company expects operating cash flow of $1.3 billion for 2016. In other words, even with $2 billion in capital investments through internal cash, Pioneer is likely to close 2016 with $1.8 billion in cash and equivalents.
In addition, the company has $1.5 billion in available facility, taking the total liquidity buffer visibility to $3.3 billion for fiscal year 2016. With these positives related to the company’s balance sheet and cash flow, it is not surprising to see Standard & Poor's maintaining an investment grade rating for the stock. The rating can be expected to continue through 2016 and potentially into 2017 if oil price recovery continues.
Another positive point about Pioneer is that the company expects production growth of 10% for 2016 even in the current commodity price environment. Production growth coupled with hedged positions will partially offset the negative impact of lower oil prices. Further, Pioneer expects sustained production growth during the period 2016 to 2018.
From a cost perspective, Pioneer Natural Resources has done exceedingly well in terms of production cost per barrel of oil equivalent. From production cost of $13.61/boe in fourth quarter 2014 the company’s production cost has declined to $11.02/boe as of fourth quarter 2015. This provides EBITDA margin support in a low oil price environment.
Pioneer is well positioned for the next 24 months from a funding perspective, and the company has been sideways for 2016. The stock can be expected to trend higher in the foreseeable future and if oil uptrend continues, the stock can deliver stellar returns in the next 12 to 24 months. However, with global economic uncertainty as a concern, I would still refrain from any big exposure to the energy sector.
Disclosure: No positions in the stock.
