Pioneer Natural Resources (PXD) Update - Feb 14

[dan_s]

My comments are in blue.

On 2/14/2019 five analysts submitted fresh reports to Reuters. Four of the five rate PXD a BUY. The HOLD rating is from Tim Rezvan at Oppenheimer, who did not provide a price target. The other four valuations range from $174 to $211. I have updated my forecast based on the information below, including the company's guidance for 2019. My valuation of PXD stays at $190/share. Keep in mind that very little of PXD's production is hedged and their revenues are heavily weighted to oil prices. If oil prices go up, there is a lot more upside for this one. Also, for a company of this size PXD has a relatively low amount of shares outstanding (171 million).
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Pioneer Natural Resources Company Reports Fourth-Quarter and Full-Year 2018 Financial and Operating Results; Provides 2019 Outlook

Pioneer Natural Resources Company (NYSE:PXD) (“Pioneer” or “the Company”) reported financial and operating results for the quarter and year ended December 31, 2018. Pioneer reported fourth quarter net income attributable to common stockholders of $324 million, or $1.89 per diluted share. These results include the effect of noncash mark-to-market (MTM) derivative gains and certain other unusual items typically excluded by the investment community in published estimates. Excluding these items, non-GAAP adjusted income for the fourth quarter was $202 million, or $1.18 per diluted share. < Compares to my forecast of $1.57 EPS.

For the full-year 2018, the Company reported net income attributable to common stockholders of $978 million, or $5.70 per diluted share. Non-GAAP adjusted income excluding noncash MTM derivative gains and unusual items for the full-year 2018 was $1.1 billion, or $6.31 per diluted share.

Fourth-Quarter and Full-Year 2018 Highlights
•Achieved corporate return on capital employed (ROCE) of 9% during 2018
•Increased dividend by 300% and repurchased $150 million, or 1.1 million shares, under authorized share repurchase plans in 2018
•Averaged fourth quarter Permian oil production of 194 thousand barrels of oil per day (MBOPD), toward the top end of guidance
•Averaged fourth quarter Permian production of 302 thousand barrels of oil equivalent per day (MBOEPD), at the top end of guidance
•Delivered 2018 Permian oil production of 181 MBOPD (23% growth) and 2018 Permian production of 283 MBOEPD (26% growth)
•Streamlined portfolio with divestments of non-core assets, increasing focus on Permian position and driving down cost structure
•Added $458 million of incremental cash flow from firm transportation (FT) agreements

President and CEO Timothy L. Dove stated, “The Company delivered an excellent fourth quarter, serving to cap a strong year where we sharpened our focus on our peer-leading Permian asset. Pioneer delivered oil production at the top end of guidance, maintained our trajectory of lowering operating costs and continued our momentum of strong operational execution.

“In 2018, we again demonstrated a year-over-year increase in well productivity, while delivering best-in-class Permian cumulative oil production and oil composition. Our unique, low-cost basis Permian acreage, unencumbered by high cost acquisitions, generated a highly competitive return on capital employed of 9%.

“We embarked on many initiatives during 2018 to permanently streamline the portfolio and increase corporate level returns. Throughout the year, the Company diligently worked to divest non-core acreage and focused our efforts on drilling high-return horizontal Permian wells. For 2019, the substantial cost savings related to the strategic divestiture of our pressure pumping assets and transition to West Texas sand will significantly decrease our cost structure and improve capital efficiencies. These actions drive an 11% decrease in drilling, completions and facilities capital, while delivering a robust 12% to 17% increase in production when compared to 2018.”

Financial Highlights

Pioneer continues to maintain a strong balance sheet with 2018 year-end cash on hand of $1.4 billion (including liquid investments) and net debt of $0.9 billion. The Company’s liquidity position remains strong at year-end 2018 with $2.9 billion of liquidity, including $1.4 billion of cash and liquid investments and a $1.5 billion unsecured credit facility (undrawn as of December 31, 2018). The Company continues to reduce its cost structure and streamline its portfolio through the divestiture of non-core assets, with proceeds from the 2018 asset divestitures totaling approximately $865 million.

Consistent with the Company’s focus on enhancing shareholder value, Pioneer is committed to the return of capital to shareholders. The Company increased its semiannual cash dividend in February 2018 by 300% from $0.04 per share to $0.16 per share. With the announcement today, the Company is doubling its semiannual cash dividend from the existing $0.16 per share to $0.32 per share ($0.64 per share on an annualized basis), representing a 700% increase since the beginning of 2018.

In February 2018, the Board of Directors authorized a $100 million common stock repurchase program to offset the impact of dilution associated with employee stock compensation awards. This program was replaced in December 2018 with a $2 billion authorization. To date, the Company has repurchased a total of 2.4 million shares for $328 million at an average price of approximately $136 per share under the December 2018 authorization.

Fourth Quarter Financial Results

For the fourth quarter, the average realized price for oil was $49.80 per barrel. The average realized price for NGLs was $26.88 per barrel, and the average realized price for gas was $1.75 per thousand cubic feet (MCF). Adjusting for the cash flow uplift attributable to the Company’s FT contracts, the average realized oil price would have increased by $9.36 per barrel to $59.16. These prices exclude the effects of derivatives. < Much lower natural gas and NGL prices is the primary reason Net Income came in below my forecast.

Production costs, including taxes, averaged $8.70 per barrel of oil equivalent (BOE). Depreciation, depletion and amortization (DD&A) expense averaged $13.75 per BOE. Exploration and abandonment costs were $32 million. General and administrative expense totaled $99 million. Interest expense was $29 million. Other expense was $533 million, or $49 million excluding unusual items3.

Operations Update

Pioneer placed 270 horizontal wells on production during 2018, of which 71 were placed on production during the fourth quarter. Well productivity continues to increase annually, with average cumulative production greater in 2018 as compared to the 2017 program. Many factors, such as incorporating data from machine learning into optimized completion designs and a focused approach to appraisal testing have contributed to the Company’s improving well productivity.

The Company’s second multi-zone Spraberry appraisal pad (Stackberry), located in Midland County, consists of eight wells: two in the Middle Spraberry, two in the Jo Mill and four in the Lower Spraberry Shale. Similar to the first Stackberry test, cumulative production has outperformed previous horizontal Spraberry wells in the area by approximately 35%. As a result, an additional 40,000 acres in the surrounding area for the Middle Spraberry, Jo Mill, and Lower Spraberry Shale intervals have been de-risked, progressing the transition of the Spraberry intervals from appraisal to development mode. The third 2018 Stackberry test was placed on production late in the fourth quarter and is still flowing back. The Company plans to spud two additional Stackberry tests late in 2019.

During 2018, the Company had several successful Wolfcamp D wells placed on production. This success continued into 2019 as a two-well Wolfcamp D pad was placed on production early in the first quarter of 2019, with an average 24-hour initial production rate of approximately 4,100 BOEPD, of which 72% was oil. This two-well pad also recorded a 20-day cumulative production of approximately 120 MBOE, with a 70% oil mix. The Company plans additional Wolfcamp D appraisals in 2019.

The Company continues to increase efficiencies, which are driving greater corporate returns. For example, large-scale developments enable operational efficiencies to be captured by performing drilling and completion practices over multiple wells. Additionally, large-scale developments decrease mobilization and non-productive time. Approximately 40% of the Company’s 2019 wells are planned to include projects consisting of four or more wells, compared to only 10% in 2018. Many of these projects will utilize “Pioneer Pads” enabling 24 wells to be drilled and completed from the same pad. The Pioneer Pad can reduce surface utilization by greater than 80%, benefiting the environment and further improving returns.

Demonstrating the benefits of long-term planning, the Company’s comprehensive water strategy continues to play a critical role in the continuing successful execution of Pioneer’s Permian development plan. Pioneer’s vast water pipeline system is remotely operated from a control room and allows for hundreds of thousands of barrels of water per day to be efficiently directed across the Company’s large acreage position. This system successfully transports the Company’s low-cost water across the field and is built to support Pioneer’s long-term development plan. Furthermore, Pioneer plans on increasing the volume of recycled water it uses to approximately 30% in 2019. This effort to decrease the Company’s dependence on fresh water not only increases corporate returns but also demonstrates Pioneer’s commitment to the communities in which it operates and its employees live. The Company plans to further reduce its freshwater consumption by increasing the use of effluent water through its investment in the Midland water treatment plant.

During the fourth quarter of 2018, the Company’s marketing of Permian oil yielded premium Brent-related oil pricing, leading to an incremental $170 million of cash flow. The full-year 2018 impact of this strategy led to $458 million of additional cash flow. The Company continues to enhance margins through its FT contracts by transporting oil and gas from its areas of production to price-advantaged markets and expects these activities to provide a cash flow uplift of $40 million to $100 million during the first quarter of 2019.

2019 Outlook

The Company expects its 2019 Permian drilling, completions and facilities capital budget to range between $2.8 billion to $3.1 billion and be fully funded within expected operating cash flow, based on current commodity prices. Including capital of $300 million related to Pioneer’s unique Permian investments in gas processing facilities and water infrastructure, the total capital program is expected to range between $3.1 billion to $3.4 billion.

The Company plans to operate an average of 21 to 23 horizontal rigs in the Permian Basin during 2019, including approximately five rigs in the southern joint venture area. This program is expected to place 265 to 290 wells on production, compared to 270 wells placed on production during 2018. The average lateral length planned for 2019 is approximately 9,800 feet, with an average estimated ultimate recovery (EUR) of approximately 1.6 MMBOE per well.

This activity level is projected to deliver 2019 Permian production of 320 to 335 MBOEPD and 203 to 213 MBOPD, representing approximately 12% to 17% growth over 2018 production levels. The Company expects 2019 forecasted operational cash flow of $3.2 billion, based on current commodity prices.

First Quarter 2019 Guidance

First quarter 2019 Permian production is forecasted to average between 302 to 317 MBOEPD and 194 to 204 MBOPD, while Eagle Ford/South Texas production is forecasted to average between 13.0 to 14.5 MBOEPD and 2.8 to 3.8 MBOPD. Permian production costs are expected to average $8.50 per BOE to $10.50 per BOE. Permian DD&A expense is expected to average $13.00 per BOE to $15.00 per BOE.

Total exploration and abandonment expense for the Company is forecasted to be $20 million to $30 million. General and administrative expense is expected to be $95 million to $100 million. Interest expense is expected to be $28 million to $33 million. Other expense is forecasted to be $45 million to $55 million and is expected to include $35 million to $45 million of charges associated with excess firm gathering and transportation commitments. Accretion of discount on asset retirement obligations is expected to be $3 million to $6 million. The Company’s effective income tax rate is expected to range from 21% to 25%. Current income taxes are expected to be less than $5 million.

The Company’s financial and derivative mark-to-market results and open derivatives positions are outlined on the attached schedules.

Proved Reserves

The Company added Permian proved reserves totaling 304 million barrels of oil equivalent (MMBOE) during 2018. These proved reserve additions equate to a drillbit reserve replacement ratio of 290% when compared to Pioneer’s full-year 2018 Permian production of 105 MMBOE, including field fuel. The Permian drillbit finding and development (F&D) cost was $11.77 per BOE, with a drillbit proved developed F&D cost of $11.94 per BOE.

As of December 31, 2018, the Company’s total Permian proved reserves were estimated at 977 MMBOE, of which 94% are proved developed. Approximately 56% of these proved reserves are oil, 23% are NGLs and 21% are gas.

As of December 31, 2018, all of Pioneer’s proved reserves were in the United States, and 92% were proved developed reserves. Approximately 54% of the Company’s proved reserves are oil, 23% are NGLs and 23% are gas.
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I will update my forecast/valuation model for PXD on Friday and post it to the EPG website.