We are maintaining our Neutral recommendation for the independent oil and gas exploration and production company, Pioneer Natural Resources Company (PXD).
Although the Texas-based company’s significant resource potential with an oil-weighted reserves base and large drilling inventory are commendable, we remain concerned about its back-end loaded 2011 production guidance.
Pioneer’s key strategic assets are the Spraberry in the Texas Panhandle and the Eagle Ford in the southeast of the state. The company stands as the largest company in the Spraberry field in terms of production and acreage and is one of the largest in the Eagle Ford.
With a ramp-up in activity at Spraberry oil field and Eagle Ford Shale, Pioneer has set a goal to increase production at a compounded annual growth rate of more than 18% for 2011–2013. This would inevitably lead to enhanced earnings and growth.
In this connection, Pioneer has allocated $1.8 billion of capital for 2011, of which $1.6 billion is planned for drilling alone as the company continues to focus on liquids-rich drilling. Notably, 75% of $1.6 billion is allocated toward the Spraberry oil field and Eagle Ford Shale.
Pioneer has hedged a portion of its projected 2011 and 2012 production at very attractive prices. This lowers the company’s near-term commodity-price exposure, which is a key positive in its profile given the current market concerns.
Importantly, the company intends to boost the number of frac crews it will have in service from four to seven during the year, which is above the prior plan of six frac crews. Additionally, liquids production continues to increase and is expected to swell from 44% to 55% of the total by 2013. With both rigs and frac fleets increasing in the Spraberry and Eagle Ford plays, we expect significant oil or liquids contribution to boost volumes in the second half of 2011. Hence, we believe Pioneer’s production forecast of 18% per year until 2013 is on the conservative side.
Again, taking into consideration Pioneer’s sensitivity to gas/oil price volatility, as well as drilling results, costs, geo-political risks and project timing delays, we see the stock as having a limited upside potential.
Hence, we expect Pioneer, which competes with Apache Corp. (APA) and Chesapeake Energy Corporation (CHK), to perform in line with the broader market. The company also retains a Zacks #3 Rank (short-term Hold rating).
