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Pioneer Natural Resources Company (PXD - Analyst Report) reported third quarter 2012 adjusted earnings of 82 cents per share, missing the Zacks Consensus Estimate of 99 cents. The quarterly earnings also plunged from the year-earlier adjusted income of $1.35 per share. The underperformance was mainly due to lower price realization.

Revenues and other income in the quarter dipped more than 38% year over year to $603.4 million, and missed the Zacks Consensus Estimate of $771.0 million.

Production

Total production in the reported quarter averaged approximately 153.0 thousand barrels of oil equivalent per day (MBOE/d), up 27.9% year over year, attributable to the company’s core growth assets, i.e. Spraberry field and Eagle Ford Shale. Again, its encouraging drilling results from the horizontal Wolfcamp Shale play is also expected to contribute considerably to its production growth in the future.

Oil production averaged 63.1 thousand barrels per day (MBbl/d), showing a significant improvement of more than 52% year over year. Natural gas liquids (NGLs) production surged 39.6% year over year to 30.4 MBbl/d. Natural gas production increased to 357.2 million cubic feet per day (MMcf/d) from the year-ago level of approximately 338.3 MMcf/d.

Price Realization

On an oil equivalent basis, the average realized price was $49.40 per barrel in the reported quarter versus $52.18 in the year-ago quarter. The average realized price for oil was $89.87 per barrel, compared with $92.11 in third quarter 2011.

Average natural gas price dropped 35.3% to $2.62 per Mcf from the year-earlier level. Natural gas liquids were sold at $31.28 per barrel, down from $48.33 in the year-ago quarter.

Cash, Debt & Capex

At the end of the quarter, the cash balance was $333.9 million. Long-term debt was $3.6 billion, representing a debt-to-capitalization ratio of 38.0% (versus 36.3% in the preceding quarter).

Pioneer plans to spend $3.0 billion this year that includes drilling capex of $2.5 billion (prior expectation was $2.4 billion) and capital for vertical integration of $0.5 billion. However, the budget excludes acquisitions, asset retirement obligations, capitalized interest and geological and geophysical G&A.

The increment in its drilling capex mainly reflects ramp-up of its appraisal activity in the horizontal Wolfcamp Shale. Pioneer continues to concentrate on liquids-rich drilling, with approximately 75% apportioned for Spraberry vertical and horizontal Wolfcamp Shale drilling and 10% for Eagle Ford Shale drilling.

Guidance

Pioneer expects its production to average between 154 MBOE/d and 158 MBOE/d for the fourth quarter of 2012.

Production costs are expected to range between $14.50 and $16.50 per BOE, and depletion, depreciation and amortization expense is expected to average around $13.50 to $15.50 per BOE. The fourth quarter exploration expense guidance is $25–$35 million and the tax rate is expected in the 35–40% range.

Our Take

Pioneer’s oil-weighted reserves base and large drilling inventory with significant resource potential are likely to unlock value for shareholders. With a ramp-up in activity at its three core liquids-rich growth assets in Texas, Pioneer aims to boost its production, which would in turn improve its earnings and growth outlook.

In particular, Pioneer’s stepped-up activities in the horizontal Wolfcamp Shale play – where EOG Resources Inc. (EOG - Analyst Report) is also a leaseholder – provides a multi-year inventory of development drilling opportunities.

Again, Pioneer remains well on track to divest all its properties in the Barnett shale region of Texas in order to focus on other core assets in the U.S. as well as reduce debt. The company hopes to complete the sale in the first quarter of 2013. The Dallas-based oil and gas company aims to redirect the proceeds to more high-return, core properties in the Spraberry vertical play, the horizontal Wolfcamp Shale play and the Eagle Ford Shale.

However, we remain skeptical about the company’s lower-than-expected earnings for two quarters in a row. Earnings got a beating from lower price realization and higher expenses.

As such, we expect Pioneer to perform in line with the broader market. We maintain our long-term Neutral recommendation on the stock.

The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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