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Pioneer Remains Evenly Poised

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We maintain our long-term Neutral recommendation on Pioneer Natural Resources Company (PXD - Free Report) – an independent oil and gas exploration and production company.

The company’s oil-weighted reserves base, large drilling inventory and impressive production growth profile are somewhat overshadowed by the lower price environment.

Pioneer’s oil-weighted reserves base and large drilling inventory − with more than 20,000 liquids-rich drilling locations in low-risk resource plays − with significant resource potential are catalysts to unlock value for shareholders. It offers a deep inventory of high-return, liquids-leveraged drilling opportunities.

The third largest driller in the country, Pioneer now remains busy with oil- and liquids-rich drilling as evidenced by its speeding up of activities in the horizontal Wolfcamp Shale play – in which EOG Resources Inc. (EOG - Free Report) is also a leaseholder. Pioneer holds the key position occupying more than 400,000 potential acres.

Earlier, the company raised its estimated ultimate recovery (EUR) for the southern portion of the play to 575 thousand barrels of oil equivalent (MBoe), which is above its prior guidance range of 350–500 MBoe. Again, in Upton County, drilling will likely continue to focus on the southern region where Pioneer holds 200,000 acres and expects to drill 90 wells by the end of 2013 to hold the expiring 50,000 acres.

Moreover, the company’s third quarter yield surpassed the guidance range buoyed by its core growth assets, i.e. Spraberry field and Eagle Ford Shale. Encouraging drilling results from the horizontal Wolfcamp Shale play are also expected to contribute considerably to production growth in the future.

Pioneer expects 2012 production growth in the range of 27% to 28% based on year-to-date results. It also boosted its drilling capex to $2.5 billion from $2.4 billion, with $0.5 billion planned for vertical integration. We see the guidance as a positive, given encouraging results from its horizontal Wolfcamp program.

However, we remain on the sidelines considering Pioneer’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays. Its third quarter earnings fell year over year, mainly due to lower price realization.

Increasing cost pressure in the highly competitive shale plays is also a cause of concern. Additionally, the Permian operations carry high execution risk owing to transition from the Spraberry vertical development program to the horizontal appraisal of the Wolfcamp.

Hence, considering the above pros and cons, we expect the Pioneer stock to perform in line with the broader market indices. The company retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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