Pioneer Natural Resources Company (PXD - Free Report) is well poised to grow on the back of strength in the Permian, a ‘super basin’. However, lack of takeaway capacity remains a concern for now.
The Irving, TX-based oil and gas exploration & production company — with a market cap of nearly $23 billion — has an expected earnings growth rate of 18.2% for the next five years. For second-quarter 2019, its earnings per share are projected at $2.24, which indicates year-over-year growth of 58.9%. It has witnessed five upward and nine downward estimate revisions in the past 60 days.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining in your portfolio at the moment.
A Look at the Positives
Pioneer Natural is a pure-play Permian basin — the most prolific oil resource in the United States — producer. In the Midland basin, the company has the largest acreage position, with operations across 750,000 gross acres of land. In the prolific basin, Pioneer Natural has approximately more than 20,000 drilling sites that are likely to provide the company with decades of crude production.
Through the March quarter of 2019, Pioneer Natural’s production level came in at the higher end of the projected range. The upstream energy player expects Permian production through 2019 in the band of 320-335 thousand barrels of oil equivalent per day (MBoE/D), higher than 319.9 MBoE/D a year ago.
The company plans to invest $2.8-$3.1 billion through 2019 in upstream operations. Notably, Pioneer Natural expects to operate an average of 21-23 rigs in Permian this year. Resultantly, it is expected to generate nearly $4 billion of cash flow.
Clearly, investors are noticing the company’s true potential. This is evident from Pioneer Natural’s gain of 3.5% year to date against the 4.1% collective decline of the industry it belongs to.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
During 2018, the company’s costs and expenses increased more than 58% from the prior-year period. In particular, oil and gas production costs increased more than 44%, and exploration and abandonments costs jumped 8%, in turn hurting the bottom line. This increasing costs can affect its profit levels in the coming quarters.
Although Pioneer Natural has been strongly committed in returning cash to its shareholders through dividend payments and share buybacks, the company’s dividend yield is significantly lower than the composite yield of the stocks belonging to the industry.
Infrastructural bottlenecks in the lucrative Permian shale play are concerning. While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Owing to pipeline capacity constraints, Pioneer Natural and other producers have to sell products at a discounted rate. Though the company is entering into agreements to improve pricing exposure, the impact of the same is unlikely to be immediate.
To Sum Up
Despite riding on significant growth prospects, pipeline takeaway constraints and rising operating costs are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are Talos Energy Inc. (TALO - Free Report) , Approach Resources Inc. and Earthstone Energy, Inc. (ESTE - Free Report) . While Talos sports a Zacks Rank #1 (Strong Buy), Approach Resources and Earthstone Energy hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Talos’ sales growth is projected at 22.9% through 2019.
Approach Resources surpassed earnings estimates in three of the trailing four quarters, with the average positive surprise being 12.7%.
Earthstone Energy’s sales growth is projected at 15% through 2019.
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