PXD - Update from Stifel with higher PT
Posted: Thu Sep 01, 2016 9:47 am
Raising NAV and Target Price on Spacing Assumptions and Lower Well Costs; Growth
Pre-Funded to Reach Cash Flow Neutrality
Stifel rates PXD a BUY with a $215 price target.
Raising NAV on Spacing Assumptions and Lower Well Costs: We are
increasing our risked NAV 24% to $229/share following multiple
changes to our models, including tighter spacing assumptions and modestly lower
well costs. Our new NAV assumes the company's Wolfcamp development occurs
using 660' inter-lateral spacing, down from our prior estimate of 880'. PXD's 2016
Wolfcamp program is primarily using inter-lateral spacing between 650'-750',
however, micro-seismic data on its new version 3.0 wells is exhibiting shorter
half-lengths which gives us confidence in our new spacing assumption and also
implies further downspacing potential. We expect to hear more on spacing
assumptions and version 3.0 well performance on PXD's 3Q call (11/2/16). The
new well costs remain $0.5MM above the 2Q16 average (to account for facilities).
Well Outperformance Continues: Our updated analysis of state data (2014-2Q16
vintages) includes 57 PXD Northern Spraberry/Wolfcamp wells. The
data clearly conveys continued productivity gains in newer vintage wells.
The majority of our northern data set is from Sale Ranch in Martin County
(42 wells), PXD's most prolific area, with the remainder located in Midland County
(15 wells). Our southern JV data set consists of 20 Upton County wells. As such,
our data may not be wholly representative of PXD's vast Midland Basin acreage.
Completion Optimizations Could Provide Upside: In addition to showing that its
version 2.0 completion design (2Q15-1Q16) is meaningfully outperforming the
original design (V-2.0 is 20% above our type curve after 12 months online), in July
management released early-time results (120 days of production) from 37 V-3.0
wells completed through 2Q16 (43 to be completed in 2H16) (Exhibit 23). While
obviously still early, the V-3.0 average is beating the type curve underlying our
NAV by 61%.
Strong Growth, No Need to Tap Equity Markets Before Cash Flow Neutrality:
PXD's production guidance of 15%/16% y/y growth in 2016/2017 and a 15%
CAGR from 2016-2020 incorporates management's version 2.0 type curve (and
includes no potential uplift from version 3.0), therefore we believe management's
guidance could be conservative. To generate this growth, we estimate
PXD will outspend 2017/2018 cash flow by 28%/9%, or a total of $770 million.
However, due to its significant cash balance (estimated to be $1.6B, after paying
off its 1Q17 notes), we estimate the company's debt/TTM EBITDA will remain at
0.5x or below through 2018. Based on the current strip and a $40/bbl downside
case, we estimate PXD's leverage would only marginally increase.
Pre-Funded to Reach Cash Flow Neutrality
Stifel rates PXD a BUY with a $215 price target.
Raising NAV on Spacing Assumptions and Lower Well Costs: We are
increasing our risked NAV 24% to $229/share following multiple
changes to our models, including tighter spacing assumptions and modestly lower
well costs. Our new NAV assumes the company's Wolfcamp development occurs
using 660' inter-lateral spacing, down from our prior estimate of 880'. PXD's 2016
Wolfcamp program is primarily using inter-lateral spacing between 650'-750',
however, micro-seismic data on its new version 3.0 wells is exhibiting shorter
half-lengths which gives us confidence in our new spacing assumption and also
implies further downspacing potential. We expect to hear more on spacing
assumptions and version 3.0 well performance on PXD's 3Q call (11/2/16). The
new well costs remain $0.5MM above the 2Q16 average (to account for facilities).
Well Outperformance Continues: Our updated analysis of state data (2014-2Q16
vintages) includes 57 PXD Northern Spraberry/Wolfcamp wells. The
data clearly conveys continued productivity gains in newer vintage wells.
The majority of our northern data set is from Sale Ranch in Martin County
(42 wells), PXD's most prolific area, with the remainder located in Midland County
(15 wells). Our southern JV data set consists of 20 Upton County wells. As such,
our data may not be wholly representative of PXD's vast Midland Basin acreage.
Completion Optimizations Could Provide Upside: In addition to showing that its
version 2.0 completion design (2Q15-1Q16) is meaningfully outperforming the
original design (V-2.0 is 20% above our type curve after 12 months online), in July
management released early-time results (120 days of production) from 37 V-3.0
wells completed through 2Q16 (43 to be completed in 2H16) (Exhibit 23). While
obviously still early, the V-3.0 average is beating the type curve underlying our
NAV by 61%.
Strong Growth, No Need to Tap Equity Markets Before Cash Flow Neutrality:
PXD's production guidance of 15%/16% y/y growth in 2016/2017 and a 15%
CAGR from 2016-2020 incorporates management's version 2.0 type curve (and
includes no potential uplift from version 3.0), therefore we believe management's
guidance could be conservative. To generate this growth, we estimate
PXD will outspend 2017/2018 cash flow by 28%/9%, or a total of $770 million.
However, due to its significant cash balance (estimated to be $1.6B, after paying
off its 1Q17 notes), we estimate the company's debt/TTM EBITDA will remain at
0.5x or below through 2018. Based on the current strip and a $40/bbl downside
case, we estimate PXD's leverage would only marginally increase.