(This an update from a story published Thursday at 11:58 a.m. EDT. This version adds details about Pioneer's production estimates in the second paragraph and in the last two paragraphs.)
Pioneer is the biggest player at the Spraberry and Wolfcamp shale rock formations, which are located in the Permian Basin in the western part of Texas. The area is one of the most prolific oil-producing regions in the U.S. The company’s core reserve base could more than double by 2016, while its output, which has been increasing at an accelerated pace, could double by 2018 from its output in 2013.
The company also stands to benefit from a recent Commerce Department ruling that will allow it to export a kind of oil known as condensates. Pioneer is the only company, besides Enterprise Products Partners (EPD - Get Report) that received this permission. The U.S. has banned the export of unrefined oil since the 1970s.
Exporting some oil will allow Pioneer to tap into international markets where oil prices carry a premium of up to $20 a barrel over domestic crude prices. The higher prices can give a boost to Pioneer's profits in the future.
Shares of Pioneer, however, are trading close to its 52-week high of $234. Through Wednesday's close, they have risen 27.6% this year, outpacing the S&P 500 Index.
By one measure, the stock is trading at about twice the average of other energy companies operating in the Permian Basin, such as Chevron (CVX - Get Report), Cimarex Energy (XEC - Get Report), Exxon Mobil (XOM - Get Report) and Occidental Petroleum (OXY - Get Report).
So investors may want to wait for a pullback before getting into Pioneer.
The Spraberry and Wolfcamp fields have led the revival of Permian Basin. According to the U.S. Energy Information Administration, the daily oil production from Permian Basin has jumped from 850,000 barrels in 2007 to 1.35 million barrels in 2013. This growth was largely driven by an increase in output from six shale-rock formations in general and from Spraberry and Wolfcamp in particular.
With 825,000 acres at the Spraberry and Wolfcamp fields, Pioneer is the largest producer of oil from this region. In April, Pioneer produced 109,000 barrels of oil equivalents per day while its closest peers, Apache (APA - Get Report) and Concho Resources (CXO - Get Report), produced just 65,000 and 38,000 barrels of oil equivalents per day from Spraberry and Wolfcamp.
Pioneer has 845 million barrels of oil equivalents of proven reserves, of which almost 51%, or 432 million barrels of oil equivalents, is located in Spraberry and Wolfcamp, and it expects to add more than 600 million barrels of oil equivalents to its reserve base at Spraberry and Wolfcamp through 2016.
Last year, the company reported an 11% increase in production overall. It has forecast growth of between 14% and 19% for this year. From 2013 to 2016, Pioneer has said that it will increase its output at an average annual rate of between 16% and 21%. Since the average growth rate is higher than what the company expects to achieve this year, we can safely assume that Pioneer’s production growth rate will get even better in the coming years.
This year, Pioneer will spend $3 billion as drilling capital expenditures, of which more than $2.7 billion will flow toward Spraberry and Wolfcamp. Consequently, the company’s production from those formations is expected to increase by between 21% and 27% this year.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates PIONEER NATURAL RESOURCES CO as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate PIONEER NATURAL RESOURCES CO (PXD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and increase in net income. However, as a counter to these strengths, we find that the company's return on equity has been disappointing."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 3.4%. Since the same quarter one year prior, revenues rose by 34.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 63.49% and other important driving factors, this stock has surged by 45.08% over the past year, outperforming the rise in the S&P 500 Index during the same period. Although PXD had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
- PIONEER NATURAL RESOURCES CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, PIONEER NATURAL RESOURCES CO swung to a loss, reporting -$3.02 versus $3.89 in the prior year. This year, the market expects an improvement in earnings ($5.75 versus -$3.02).
- The gross profit margin for PIONEER NATURAL RESOURCES CO is rather high; currently it is at 64.05%. Regardless of PXD's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, PXD's net profit margin of 11.63% compares favorably to the industry average.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, PIONEER NATURAL RESOURCES CO's return on equity significantly trails that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: PXD Ratings Report