Financial Markets - Investor Desk

Business Strategy and Outlook

Pioneer Natural Resources is one of the largest Permian Basin oil and gas producers overall, and is the largest pure play. It has about 800,000 net acres in the play, all of which is located on the Midland Basin side where it believes it can get the best returns.That gives Pioneer an extensive runway of low-cost drilling opportunities primarily targeting the Wolfcamp A, Wolfcamp B, and Spraberry reservoirs. Like other Permian operators, Pioneer’s production is weighted toward liquids—over 80% of its output is crude oil and natural gas liquids, boosting unit revenue. By focusing on the most productive parts of the Permian, it is able to keep its unit costs well below the peer average. Getting into the basin early also means the firm also enjoys relatively low royalty rates, giving it a further advantage over many of its competitors. Pioneer has expanded fairly rapidly, with annual production growth averaging 10%-15% over the last decade or so. But the company is now prioritizing generous shareholder distributions ahead of further volume expansion. The current plan calls for no more than 5% annual growth while reinvesting much less than 100% of operating cash flows. The remaining surplus will be used to preserve Pioneer’s very impressive balance sheet, and to return cash to shareholders via a part-variable dividend.

Financial Strength

Pioneer’s leverage ratios were uncharacteristically high for much of 2021, owing to two substantial acquisitions (Parsley and DoublePoint). But the firm has been generating substantial free cash since then, and the subsequent divestiture of the Delaware Basin assets that were bundled with these acquisitions improved the firm’s balance sheet even further (with proceeds exceeding $3 billion). As a result, the firm now has one of the strongest balance sheets in the segment, with very low leverage ratios and at strip prices, the firm will reach zero net debt by the end of 2022.After the last reporting period, net debt/EBITDA was around 0.4 times and debt/capital is 23%. Management has mentioned a leverage ratio cap of 0.75 times, but really wants absolute debt to be as low as possible, or zero, so it can capitalize in cyclical downturns by aggressively buying back stock without worrying about the impact on the balance sheet.The firm has around $3 billion in maturities due between now and 2025, all of which can be comfortably funded from cash on hand or from operating cash flows (without compromising the firm’s ability to pay the fixed and variable components of its dividend). It has ample liquidity in reserve, too, with another $1.5 billion available on its undrawn credit facility.

Bulls Say

Pioneer’s low-cost Permian Basin activities are likely to generate substantial free cash flows in the years to come, assuming mid cycle prices ($55/bbl for WTI).
The firm intends to target a 10% total return for shareholders via its base dividend, a variable dividend with a payout of up to 75% of free cash flows, and 5% annual production growth.
Pioneer has a rock-solid balance sheet and is able to generate free cash flows even during periods of very weak commodity prices.

Company Profile

Headquartered in Irving, Texas, Pioneer Natural Resources is an independent oil and gas exploration and production company focusing on the Permian Basin in Texas. At year-end 2021, Pioneer’s proven reserves were 2.2 billion barrels of oil equivalent with net production for the year of 612 mboe per day. Oil and natural gas liquids represented 68% of production

(Source: Morningstar)

Relative to the pcp: (1)

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