Pioneer Natural Resources Company (PXD - Free Report) is well poised to grow on the back of strength in the Permian, a ‘super basin’. However, lack of takeaway capacity remains a concern for now.
The Irving, TX-based oil and gas exploration & production company — with a market cap of nearly $21.6 billion — has an expected earnings growth rate of 21.4% for the next five years. For 2019, its earnings per share are projected at $8.33, which indicates year-over-year growth of 32%. It has witnessed five upward and seven downward estimate revisions in the past 60 days.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining in your portfolio at the moment.
A Look at the Positives
Pioneer Natural is a pure-play Permian basin — the most prolific oil resource in the United States — producer. In the Midland basin, the company has the largest acreage position with operations across 750,000 gross acres of land. In the prolific basin, Pioneer Natural has identified more than 20,000 drilling sites that are likely to provide the company with decades of crude production. It has roughly 10 more years of drilling inventory in the region, where it can keep producing without a deceleration in the current output pace. Moreover, given its acreages in the prolific basin, the company does not have to turn to less productive sites.
With efficiency improvement in drilling and completion activities, the company has managed to lower the top end of its capital budget for 2019 by 4.5%. Moreover, the upstream energy player expects Permian production through 2019 in the band of 320-335 thousand barrels of oil equivalent per day (MBoE/D), indicating an increase from 319.9 MBoE/D a year ago.
Pioneer Natural expects to operate an average of 21-23 rigs this year, from which it will likely generate free cash flow of $600 million. This is expected to help the company to continue with the trend of increasing quarterly dividends. Notably, it has managed to increase annualized dividend by roughly 2100% over the past few years. Markedly, as part of the authorized $2-billion share buyback program, the company has executed $528 million of repurchases.
What’s Deterring the Stock?
There are a few factors that are holding back the stock from reaching its true potential.
With the widespread fear of global economic recession hurting oil demand, the price of the commodity is unlikely to recover anytime soon. The weak crude pricing environment is expected to hurt the company’s upstream operations, with oil contributing more than 60% to the total production mix.
Although Pioneer Natural has been committed to return cash to its shareholders through dividend payments and share buybacks, the company’s dividend yield is significantly lower than the composite yield of the stocks belonging to the industry.
Infrastructural bottlenecks in the lucrative Permian shale play are concerning. While production in the Permian is soaring, the takeaway capacity is not increasing in proportion. Due to pipeline capacity constraints, Pioneer Natural and other producers have to sell products at a discounted rate. Though the company is entering into agreements to improve pricing exposure, the impact of the same is unlikely to be immediate. While more than 90% of Pioneer Natural’s forecast oil production is covered under firm contracts, the remaining portion might not have any immediate respite from the concerns.
To Sum Up
Despite significant prospects, pipeline takeaway constraints and low oil prices are affecting the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are Matrix Service Company (MTRX - Free Report) , Holly Energy Partners, L.P. (HEP - Free Report) and Pembina Pipeline Corp. (PBA - Free Report) . While Matrix Service sports a Zacks Rank #1 (Strong Buy), Holly Energy and Pembina hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Matrix Service’s 2019 earnings per share are expected to rise 58.4% year over year.
Holly Energy Partners’ 2019 earnings per share are expected to rise 8.8% year over year.
Pembina’s 2019 earnings per share are expected to rise 21.5% year over year.
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