Pioneer (PXD) Remains Neutral

We retain our Neutral recommendation for Pioneer Natural Resources Company (PXD).

Irving, Texas-based company recently reported better-than-expected second quarter 2010 financial results, owing to its growth in Spraberry field, Eagle Ford Shale and Alaska. Second-quarter earnings were 43 cents per share, beating the Zacks Consensus Estimate of 42 cents and the year-earlier quarter’s loss of 10 cents.

Total production for the quarter fell short by 1.6% on a year-over-year basis to 113.5 thousand barrels of oil equivalent per day (MBoe/d), which was at the low end of the company’s guidance of 113-115 MBoe/d. The ramp-up in Spaberry, Eagle Ford and Alaska was offset by the unplanned shut-ins at the Trans Alaska Pipeline and the Mid-Continent gas processing facility, which reduced volumes by approximately 1.5 MBoe/d.

On a positive note, Pioneer, with a low risk resource base, is largely equipped with crude oil and natural gas liquids. Crude oil generates a substantial portion of Pioneer’s revenues on a per BTU basis compared with natural gas. The company is also making concerted efforts to grow liquids production in Spraberry, the Eagle Ford Shale and to a lesser degree in Alaska. Moreover, the company is progressing fast in securing equipment and install infrastructure to ensure rapid delivery in the Spraberry (to 40 rigs by 2012 from 20 currently) and Eagle Ford Shale (to 14 rigs by 2012 from 5 currently) project areas.

Pioneer recently sold a 45% interest in approximately 212,000 net acres in the Eagle Ford Shale play to India’s Reliance Industries Limited for a total consideration of $1.15 billion. Given Pioneer’s focus on oil production along with the drilling activity from the Reliance joint venture (JV), it remains confident of meeting its targeted 15% per annum growth through 2013.

The company is operating as per its financial strategy, which enables substantial overall growth and significant free cash flow generation. Pioneer’s 2010 capital spending budget has increased to $1.2 billion (including midstream and acreage purchases). Drilling capital will be spread out primarily among Spraberry, Eagle Ford and Alaska, and about $50 million will be spent in the Barnett Combo play. The company has also targeted an operating cash flow of $1.2 billion, excluding the upfront cash payment of $266 million from Reliance related to the Eagle Ford Shale JV transaction, to fund this year’s capex.

However, the company’s third quarter 2010 production guidance remains almost flat compared with the second quarter 2010 at 113 MBoe/d to 116 MBoe/d, after adjusting for the 1.5 MBoe/d lost due to the unplanned pipeline curtailments and the 1 Mb/d of sold volume associated with the Eagle Ford JV.

In the light of the premium valuation and poor performance track record versus its peer group for the last few years, we remain on the sidelines, awaiting better signs of improved execution.

Currently, the company holds a Zacks #3 Rank (short-term Hold rating). Its long-term recommendation is Neutral.

PIONEER NAT RES (PXD): Free Stock Analysis Report

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