Pioneer Natural Resources Company (PXD) has reported second quarter 2012 adjusted earnings of 78 cents per share, missing the Zacks Consensus Estimate of 98 cents. The quarterly earnings also plunged from the year-earlier adjusted income of 94 cents. The underperformance was mainly due to lower price realization as well as higher expenses.
Revenues in the quarter jumped to $924.7 million from $805.2 million in the year-ago quarter, and exceeded the Zacks Consensus Estimate of $745.0 million. The growth was mainly on the back of outperformance at the Spraberry play and strong results from the Eagle Ford shale and Barnett Shale combo. The initial outcome of Wolfcamp play is also encouraging.
Production
Total production in the reported quarter averaged approximately 150.5 thousand barrels of oil equivalent per day (MBOE/d), up more than 32% year over year, attributable to the company’s three core growth assets, i.e. Spraberry field, Eagle Ford Shale and the Barnett Shale Combo.
Oil production averaged 61.4 thousand barrels per day (MBbl/d), showing a significant improvement of more than 71% year over year. Natural gas liquids (NGLs) production surged 23.4% year over year to 27.0 MBbl/d. Natural gas production increased to 372.7 million cubic feet per day (MMcf/d) from the year-ago level of approximately 337.4 MMcf/d.
Price Realization
On an oil equivalent basis, the average realized price was $46.86 per barrel in the reported quarter versus $54.24 in the year-ago quarter. The average realized price for oil was $88.32 per barrel, compared with $104.34 in second quarter 2011.
Average natural gas price dropped 51.3% to $2.00 per Mcf from the year-earlier level. Natural gas liquids were sold at $32.62 per barrel, down from $48.16 in the year-ago quarter.
Cash, Debt & Capex
At the end of the quarter, cash balance was $317.8 million. Long-term debt was $3.3 billion, representing a debt-to-capitalization ratio of 36.3% (versus 31.0% in the preceding quarter).
Pioneer has increased its 2012 capital expenditure budget to $2.9 billion from $2.8 billion and plans to fund it from the projected operating cash flow of $1.8 billion and proceeds of approximately $500 million from Pioneer’s recent equity offering. The company aims to concentrate on the drilling operations in the horizontal Wolfcamp Shale and the Eagle Ford Shale.
Guidance
Pioneer expects its production to average between 155 MBOE/d and 159 MBOE/d for the third quarter of 2012.
Production costs are expected to range between $13.50 and $15.50 per BOE (based on the current NYMEX price), and depletion, depreciation and amortization expense is expected to average around $13.00 to $15.00 per BOE. The third quarter exploration expense guidance is $25–$40 million and the tax rate is expected in the 35–40% range.
The company increased its production growth guidance to 25%-29% from 23% to 25% for the current year, on the back of strong drilling results and robust outcome of wells that are likely to outweigh reduced drilling operations for the balance of 2012.
Earlier, the company had reported that it expects to maintain its compound annual production growth target at more than 20% through 2014 with liquids increasing from 58% of total production in the quarter to 65% in 2014. This liquids-focused production target is estimated to generate a compound annual operating cash flow growth of more than 25% over 2012–2014.
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 has set a goal to increase through 2014, 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) is also a leaseholder – provides a multi-year inventory of development drilling opportunities. The company’s first two successful wells in Upton County are already registering above expected results.
In addition, Pioneer has placed five new wells in southern Upton and Reagan County and has commenced oil production recently. Pioneer intends to increase its rig count to 7 and drill 30–35 wells by the end of 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 of concern. 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. Longer term, the company maintains a Neutral recommendation on the stock.
EOG RES INC (EOG): Free Stock Analysis Report
PIONEER NAT RES (PXD): Free Stock Analysis Report
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