Pioneer Natural Resources Company (PXD) reported first quarter 2011 adjusted earnings of 68 cents per share, outpacing the Zacks Consensus Estimate of 53 cents and showing a decent improvement from the year-earlier income of 48 cents. Better-than-expected results were mainly attributable to production growth in the Spraberry field and Eagle Ford Shale.

Revenues in the quarter upped 4% to $527.6 million from $507.0 million in the year-ago quarter, but lagged the Zacks Consensus Estimate of $534 million.

Production

Total production in the reported quarter averaged approximately 111.2 thousand barrels of oil equivalent per day (MBOE/d), up a modest 2% year over year. Oil production averaged 30.5 thousand barrels per day (MBbl/d), up 28% year over year.

In March, the company disclosed that weather-related hindrances affected its operations in Texas, Kansas and Colorado, with pipeline freeze-ups, power outages and limited access to well locations reducing the quarter’s production by 2 MBoe/d.

Natural gas production increased more than 7% year over year to 348.7 million cubic feet per day (MMcf/d). Natural gas liquids production fell 2.5% year over year to 18.6 MBbl/d.

Price Realization

On an oil equivalent basis, average realized price was $49.67 per barrel versus $48.16 in the year-ago quarter. The average realized price for oil was $95.62, compared with $91.48 in first quarter 2010.

Average natural gas price dropped 21% to $4.14 per Mcf from the year-earlier level. Natural gas liquids were sold at $42.17 per barrel, up marginally from $41.82 in the year-ago quarter.

Financials

At the end of the first quarter, cash balance was $520.7 million. Long-term debt balance was $2,562.7 million, representing a debt-to-capitalization ratio of 36.0% (versus 38.1% in the preceding quarter).

Pioneer set its 2011 capital expenditure budget at $1.8 billion, of which $1.6 billion is apportioned for drilling activities and $0.2 billion for vertical integration and facilities. The drilling operations will focus on the liquid-rich Spraberry and Eagle Ford Shale plays.

Company Guidance

The company expects its second quarter 2011 production to range from 116−121 MBOE/d. The company’s full-year production guidance at 125–130 MBoe/d, represents a year-over-year increase of 15–19%, fueled by perked up drilling operations in Spraberry and Eagle Ford Shale plays.

Production costs are expected to range between $12.00 and $14.00 per BOE (based on current NYMEX price), and depletion, depreciation and amortization expense is expected to average around $13.50 to $15.00 per BOE.

The second quarter exploration expense guidance is $25–$35 million and the tax rate is expected in the 35–45% range.

For 2011, Pioneer pointed out that its accelerated drilling program will be funded by operating cash flow and proceeds from the sale of its Tunisian subsidiaries. The company has targeted operating cash flow of $1.5 billion for the current year.

Our Take

Pioneer’s oil-weighted reserves base and large drilling inventory (over 20,000 liquids-rich drilling locations in low-risk resource plays) with significant resource potential are likely to unlock value for shareholders.

Further, the divestment of non-core assets complemented by the ramp up in the Spraberry oil field and the Eagle Ford Shale would spur Pioneer’s production by 18% per year until 2013. This would inevitably lead to enhanced earnings and growth. The company also intends to increase its rig count to 35 in Spraberry by mid 2011 and 45 by early 2012.

However, 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 limited upside potential for its shares. Increasing cost pressure in the highly competitive shale plays is also a cause for concern. As such, we expect Pioneer to perform in line with the broader market.

The company holds a Zacks #3 Rank, which is equivalent to a short-term ’Hold’ rating. We maintain our long-term “Neutral” recommendation on the stock.

The company competes with Apache Corp. (APA) and Chesapeake Energy Corporation (CHK).

 
APACHE CORP (APA): Free Stock Analysis Report
 
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PIONEER NAT RES (PXD): Free Stock Analysis Report
 
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