In the last few months, I discussed several energy names that are worth buying with the sector valuations being depressed. Pioneer Natural Resources (PXD, Financial) was one of the energy names I discussed, and it is pleasing to see the stock higher by 31% year to date.
However, the upside momentum is not over for Pioneer Natural Resources, and the stock can witness another 15% to 20% upside for the remainder of 2016 if oil prices remain supportive.
Coming to the first reason to be bullish on the stock, Pioneer Natural Resources reported first-quarter production of 222mboepd, which was above the company’s guidance of 211-216mboepd. Further, Pioneer now expects 2016 production growth to be 12% as compared to 10% production growth guidance earlier.
With revision in production estimates, the stock will discount this positive in the coming months. Further, Pioneer Natural Resources has indicated in its first-quarter presentation that, if oil trends higher to $50 per barrel, the company will be adding 5 to 10 horizontal rigs, and with oil gaining positive momentum, there can be renewed revision to production estimates for fiscal years 2016 and 2017.
The very point that Pioneer Natural Resources is well positioned to increase the number of rigs if oil prices trend higher speaks of the company’s financial health, and that’s the second important reason to be bullish on the stock. As of the first quarter, Pioneer Natural Resources had cash and liquid investments of $2.5 billion, and that provides strong financial flexibility in challenging times.
Further, it is also important to note that the company has strong hedged positions, and this implies operating cash flow will remain healthy and provide an additional boost to the company’s cash position. For the first quarter, Pioneer Natural Resources reported realized oil price of $28.09 per barrel and, including the impact of hedges, the realized prices increased to $45.35 per barrel.
Besides its strong financial health, Pioneer Natural Resources has also been successful in reducing cost per barrel, and that adds to the EBITDA margin. For the first quarter, the company reported production cost of $9.17 per barrel as compared to production cost of $12.56 per barrel in the first quarter of 2015.
With these positives in consideration, Pioneer Natural Resources certainly remains attractive for 2016 and beyond. Of course, the key factor remains the direction of oil prices, but oil has been trending higher even after the failed Doha deal. If the dollar remains weak, oil prices can be supported to some extent. However, investors need to closely watch global economic developments as that’s the key factor from an oil price trend perspective.
The company’s assets are also an important point of discussion when considering exposure for the long term, but I have discussed Pioneer Natural Resources in detail in the past, and there is little doubt the company’s prized Permian assets will deliver long-term cash flows. Therefore, investors who are bullish on oil prices from a three- to five-year horizon can consider exposure to Pioneer Natural Resources for this period.
Disclosure: No positions in the stock.
