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We reaffirmed our Neutral recommendation on Pioneer Natural Resources Company (PXD - Analyst Report) on Sep 3, 2013. Its drilling venture helped it to deliver production beyond its expectation. However, increasing cost pressure in the highly competitive shale plays is a cause for concern. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.
Pioneer – an independent oil and gas exploration and production company – has enjoyed continued successes in the Wolfcamp operations and a new joint venture in its southern Wolfcamp acreage. These are likely to act as catalysts for growth.
The company’s oil-weighted reserves base, large drilling inventory (over 20,000 liquids rich drilling locations in low-risk resource plays) as well as significant resource potential are catalysts to unlock value for shareholders. The company offers a deep inventory of high-return, liquids-leveraged drilling opportunities.
Pioneer, the third largest driller in the country, focuses on oil- and liquids-rich drilling, as evidenced by the speeding up of activities in the horizontal Wolfcamp Shale play, where it holds the key position occupying more than 400,000 potential acres. The northern Wolfcamp/Spraberry acreage is expected to hold about 3 billion barrels of oil equivalent of resource potential, and the company is ramping up its appraisal activity of the Wolfcamp, Jo Mill and Spraberry Shales across its northern acreage. Again, in Upton County, Pioneer will likely continue to focus its drilling on the southern region where it holds 200,000 acres and expects to drill 90 wells by the end of 2013.
Pioneer’s joint venture (JV) to speed up development of the 200,000 acre focus area in the southern portion of the Midland Basin is progressing well. The company announced that nine new Wolfcamp B wells started production during the first half of 2013 with an average peak 24-hour initial production rate of 911 barrels oil equivalent per day following strong horizontal drilling results in the southern Wolfcamp joint interest area. The company had farmed out 40% of its 100% holding in the shale, in the southern portion of the Spraberry trend area field to Sinochem Group for $1.7 billion. Per the development plan, both the companies have proposed to drill 86 horizontal Wolfcamp Shale wells in 2013. This will increase to 120 wells in 2014 and 165 wells in 2015. The proceeds from the JV will go toward addressing next year’s funding issues. Further, an equity offering of 8 million shares worth about $1 billion is likely to accelerate activity in the northern Wolfcamp Shale.
Pioneer has estimated its 2013 production growth in the range of 38 thousand barrels of oil equivalent (MBoe) per day to 42 MBoe per day, reflecting an increase of 36% to 50% from the 2012 levels. The company’s capital expenditure budget for 2013 is $3.0 billion. Pioneer has apportioned around $2.75 billion for drilling, while the remaining $0.5 billion is planned for vertical integration, expansion of the Brady, Texas sand mine and several new offices as well as field buildings. We see the guidance as a positive, given encouraging results from its horizontal Wolfcamp program.
However, the company’s long-term production and reserve growth depends on its acquire-and-exploit model, to a certain extent. Pioneer may therefore find it difficult to complete accretive transactions in the future, which could hurt its growth rate.
Other Stocks to Consider
While we prefer to remain on the sidelines for Pioneer, there are other stocks in the sector that appear rewarding. Among these, Range Resources Corporation (RRC - Analyst Report), Carrizo Oil & Gas Inc. (CRZO - Snapshot Report) and Whiting Petroleum Corp. (WLL - Snapshot Report) are expected to perform impressively over the next few months and carry a Zacks Rank #1 (Strong Buy).