Pioneer Natural Resources (PXD, Financial) has been on my investment radar through 2016 and the stock delivered strong returns of 60% in the last 12 months. For investors who are bullish on the oil and gas sector, Pioneer is a great portfolio stock pick. I expect the stock to provide strong returns in 2017. Based on the company’s strong fundamentals, Pioneer Natural Resources is among the top investment picks for 2017.
Pioneer has strong fundamentals. As of Sept. 30, 2016, Pioneer had $891 million in cash and $1,733 million in short-term investments. With a total liquidity buffer of $2.6 billion and $1.5 billion in undrawn credit facility, Pioneer has strong financial muscle for growth.
For the year, Pioneer expects capital expenditure of $2.1 billion and the entire investment is likely to be funded through operating cash flow and internal cash. As a policy, Pioneer intends to spend within cash flows considering $55 per barrel oil through 2018.
The reason for elaborating on this point is that I am bullish on oil being above $60 per barrel in 2017, which implies the following.
- Pioneer will have higher investment outlay in 2017, which can potentially translate into higher-than-expected production growth.
- Pioneer has undrawn credit facility as an additional buffer. If oil prices sustain at higher levels, I expect the company to use its strong financial muscle for inorganic growth to capitalize on higher oil prices.
- Importantly, Pioneer is well funded for the next 12 to 24 months through existing cash buffer, available credit facility and potential cash flows (even with higher investment targets). With the company expecting approximately 25% of operating cash flow growth on a year-over-year basis, the funding outlook remains robust.
With these points in consideration, I am not concerned about the company’s financial health even if oil sustains at current levels. The key factor to watch from an investor’s perspective is how quickly Pioneer can accelerate production growth if oil moves faster than expected. From that perspective, Pioneer is certainly well positioned.
Considering margins and cash flow upside, the following will serve as stock upside triggers in 2017.
- Of the total production in 2016, 57% is weighted towards oil. This is likely to increase to 62% in 2017. As oil trends higher, a higher share of oil production is positive for the EBITDA margin and cash flow upside.
- In third-quarter 2016, the average realized price (excluding hedges) for Permian horizontals was $33.2 and the cash margin was $29.18 (70%). With Pioneer increasing its horizontal drilling focus in 2017 and with Permian being the key cash flow machine, I expect the EBITDA margin to expand and the Permian horizontals to serve as the key trigger for targeted growth in cash flow by 25%.
Another area where Pioneer has delivered excellence on a sustained basis is the steady decline in production costs per barrel of oil equivalent. From a per barrel cost of $11.62 in third-quarter 2015, the cost declined to $7.85 in third-quarter 2016. Centralization of activities, reduced chemicals cost and other cost reduction initiatives have helped deliver this strong performance.
In conclusion, Pioneer Natural Resources has deep drilling inventory and strong financial muscle that positions the company well in times of bullish oil prices. The company is fully funded for the next 24 months and if oil trends meaningfully higher, I expect the company to surpass its 13% to 17% production growth target for 2017. Overall, Pioneer Natural Resources is a stock worth considering at current levels.
Disclosure: No positions in the stock.
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