Pioneer Natural Resources Company (PXD)

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Alexander Kowalsky

247WallSt

247WallSt.com

Pioneer Natural Resources Company (NYSE: PXD) is an independent oil and natural gas exploration and production company with predominantly onshore operations in the United States, Canada, Equatorial Guinea, Nigeria, South Africa and Tunisia. Pioneer has a solid foundation of on-shore properties anchored by several key oil and gas fields located throughout the southwest Texas Panhandle and southern Colorado, most notably the Spraberry oil field located in West Texas, the Hugoton gas field located in Southwest Kansas, and the Raton gas field located in southern Colorado.

In 2006 Pioneer abandoned most of its offshore deepwater oil exploration operations, ending a 5-year enterprise with the sale of its U.S. properties and Argentine deepwater operations at a cost of $1.3 billion and $675 million, respectively. Pioneer’s move away from high-risk, high cost operations in favor of lower-risk land based operations is risky, since the demand for offshore deepwater drilling continues to increase and the availability of land based properties is decreasing. Pioneer’s production growth will depend on its ability to effectively reinvest capital from its offshore sales into promising land based resource basins.

Pioneer's future growth will depend on its strategic use of the capital gained from the sale of its offshore assets. The firm may also gain further flexibility by selling some of its domestic, onshore assets to investors in a MLP (master limited partnership), which would enable the company to offer tax exemptions and unlock additional value in its resources by encouraging investment. The proposed MLPs, in Colorado and Texas, have been temporarily put on hold due to unfavorable market conditions, and in the meantime Pioneer will pursue low-risk plays in emerging resource basins in Tunisia and two large-scale development and production projects in South Africa and Alaska.^[1]

Company Overview

Founded in 1997, Pioneer flourished while operating high-quality assets in the Spraberry oil field in West Texas and the gas-rich Raton basin in Southeastern Colorado. Pioneer's initial success from onshore operations led the company to enter the more risky, high-cost deepwater oil exploration arena in 2001. Pioneer developed drilling activities in offshore U.S. and Argentinian properties, but this proved to be exceedingly expensive with Pioneer's operating expenses out-weighing the company's operating income nearly 4 to 1 since 2001. Pioneer's offshore operations ultimately proved to be too costly and susceptible to dry-hole risk (meaning the company drilled unproductive wells). Furthermore, the company was highly leveraged as it needed to borrow capital to finance its exploration activities, at almost a 1:2 debt to capitalization ratio.

In 2006 Pioneer decided to abandon its offshore operations in order to mitigate costs and reinvest its sale proceeds into onshore drilling. Shifting all its focus back to onshore exploration and production is a daunting task, as the industry has become increasingly competitive, and given the already expensive costs of U.S. E&P properties, Pioneer may find it difficult to find reasonably priced acquisitions. The firm does have room for production growth via multiple-year drilling programs at four of its established onshore fields, however; these include the Spraberry Field in west Texas, Raton Basin in Colorado, Edwards Trend in south Texas, and onshore in Tunisia

In 2010 Pioneer said that it was seeking bids from potential partners to develop its holdings in the Eagle Ford shale gas play in south Texas. At the time, a prime suspect to partner with Pioneer was Chesapeake Energy Co. (NYSE:CHK). Chesapeake had been selling off non-core assets to raise cash to pay down its massive debt, but a relatively small investment in Eagle Ford could have paid off nicely for the company. France’s Total S.A. (NYSE:TOT) had first rights on an investment in Eagle Ford from an earlier deal with Chesapeake, but the French company demurred. India’s Reliance Industries has agreed to invest $1.15 billion in a joint venture with a subsidiary of Pioneer in exchange for a 45% interest in 212,000 net leased acres in the Eagle Ford play..^[2]

Pride is currently in the process of expanding operations abroad in Tunisia and South Africa in order to achieve a more balanced business structure that is less dependent on one specific area, namely the United States. The firm has made promising discoveries in Alaska, Tunisia, and offshore South Africa in recent years. Operations in South Africa have led to decisions to build production facilities there, and this region is a core location for Pioneer's long-term growth.

Trends and Forces

• Pioneer's Decision to Exit the Deepwater Oil Exploration Industry Isolates it from a Major Growth Source- Exiting the offshore drilling market may prove to be a costly decision for Pioneer as the surge in demand for deepwater rigs has stimulated record breaking day-rates. Pioneer's move away from offshore drilling is surprising because the recent increases of oil and gas costs have enabled offshore drilling companies to engage in deepwater oil exploration that was once too expensive to pursue. Pioneer’s focus on onshore basins gives the company little need for exploration activity and the decision to abandon offshore operations will scale back exploration costs and operating expenses. Pioneer believes it is better poised to operate within the onshore drilling arena by diverting its capital away from risky exploration operations and reinvesting in more promising and well defined resource basins.

• Volatile Gas and Oil Prices Impact Pioneer's Profitability- High oil and gas prices are the most important factors for Pioneer's bottom line. The dramatic increase in gas and oil prices has stimulated Pioneer to expand operations in areas the company knows are proven producers while market conditions are favorable for the oil and gas industry. Instead of gambling on high-risk plays, Pioneer is betting on oil and gas prices to remain high so the company so its land-based properties will be enough to drive revenue growth.
  • OPEC's Role- OPEC has played a key role in regulating and maintaining profits for the oil and gas industry. Pioneer stands to gain from artificially high oil and gas prices because the company's profitability is dependent on high market prices for commodity goods.

• Emerging Markets in Hybrid and Alternative Energy Technology May Compete with Pioneer in the Long Term - Rising oil prices have led both consumers and companies to seek out alternative sources of energy and invest in renewable energy such as nuclear, solar, wind, biofuels, and ethanol. As global consumer demand shifts toward renewable energy sources due to recent environmental concerns over climate change, a shift in consumer consciousness may adversely affect the oil and gas industry. With the advent of hybrid and fuel cell vehicles and the cost of gasoline becoming dangerously close to $4 per gallon, consumers have become less inclined to purchase gas guzzling SUV’s opposed to more fuel-efficient cars. As a result oil and gas companies stand to lose if the industry encounters a sudden decrease in demand.

Competition

Pioneer needs to expand and develop existing properties if the company intends to remain competitive. Among its competitors Pioneer owns the most total acreage but proportionally has the least developed and as a result, the company's operating margins suffer. Pioneer should be in good shape if it can make better use of properties that have long-term production potential, namely the Spraberry oil field located in West Texas, and the Hugoton gas field located in Southwest Kansas. Pioneer is currently in the process of restructuring after selling its offshore operations and could become a market leader in the on-shore drilling industry if it enjoys several years of production growth in its core properties while it builds up its new sources in Tunisia, Alaska, and South Africa.

Below is a table comparing several independent oil & gas companies across several metrics.^[5]

Footnotes

1. ↑ PXD Corporate Website
2. ↑ http://247wallst.com/2010/06/25/foreign-investors-buy-into-shale-gas-play/
3. ↑ http://finance.google.com/finance?fstype=ii&q=NYSE:PXD&hl=en
4. ↑ http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=PXD
5. ↑ All data compiled from company annual reports and 10-K's
6. ↑ MMcfe/day, or millions of natural gas cubic feet equivalent, is a measure of the level of production per day that converts oil into the energy-yielding natural gas equivalent using a ratio of 6 to 1 (natural gas to oil)
7. ↑ All Data Complied from 2006 Anuual 10-k Reports