MS Raises PXD to Outpreform

[dan_s]

Pioneer Natural Resources Co.: Upgrading the Archetypal Shale Stock
Evan Calio – Morgan Stanley
July 13, 2015 10:23 AM GMT

Despite offering best-in-class reserve upside, drilling inventory, and growth potential, PXD has lagged Permian and large cap peers driven by macro and hedge fund criticism. We believe the stock and sector pullback provide a good entry point. Raise to OW, PT $190.

US E&Ps are the upstream winners and they are back at new lows. The economics and value of US unconventional resource continues to improve at a faster rate than most global resources. Improving efficiencies are an ongoing theme and accelerated in 1H15. In our view, improved efficiencies and completions will translate to better profitability in an upcycle, while service costs deflation will revert at a moderate pace as activity ultimately resumes. US E&Ps are outperforming large cap integrated and global super majors, substantiating strong investor appetite for the sector but also indicating investors’ preference for US E&Ps and higher growth and returns. We believe that while the oil price will remain volatile in the near term, it is in the midst of a multi-year cyclical recovery. Oil demand continues to be robust and supply will ultimately decelerate (due to capex reductions). We believe US E&Ps represent greater value than consensus believes given the dynamic (improving) nature of US unconventional NAVs. Given the sector pullback to new lows, substantial underperformance vs. market, and advantaged global asset position, we view risk-reward as attractive.

PXD: buying best-in-class US unconventional inventory. PXD leads the US resource “haves” with the deepest well inventory in high-return plays among large-cap E&Ps with over +10MMboe reserve upside and drilling inventory that includes ~20,500 net unrisked location and ~6,750 risked locations, or over 20 years of drilling inventory at current levels. We believe PXD's inventory depth will allow it to grow production longer than peers and cause the market to assign the stock a consolidation multiple.