11.1%-Yielding Pioneer Natural Resources Stock Has 50% Upside Potential
July 24, 2023
Pioneer Natural Resources Co Is Bullish: Here’s Why
Bullish bets are piling back on for oil and natural gas stocks like Pioneer Natural Resources Co (NYSE:PXD). Stock traders are turning optimistic because of expectations that Saudi Arabia’s oil production cuts have put a higher floor under energy prices.
Even if Saudi Arabia’s production cuts don’t move oil prices up much in the near term, analysts see the market tightening this quarter. That said, West Texas Intermediate (WTI) oil prices have rallied by more than 13% from a low of $66.20 per barrel in early June to more than $75.00 per barrel today.
That’s great news for Pioneer Natural Resources Co, an independent oil and gas exploration and production company.
The business has the largest contiguous acreage position in the Permian Basin of West Texas. There, the company explores for, develops, and produces oil, gas, and natural gas liquids (NGL). (Source: “Investor Presentation: June 2023,” Pioneer Natural Resources Co, last accessed July 20, 2023.)
The Permian Basin is one of the most well-known hydrocarbon-producing areas. Since the first well was drilled there in 1920, more than 30 billion barrels of crude oil have been recovered.
Some experts believe there are at least 20 billion barrels remaining. Others say the untapped resources could rival the supply of the Ghawar Field, the world’s largest oil field in Saudi Arabia, which has more than 48.2 billion barrels of oil. (Source: “Saudi Arabia’s Biggest Oil Field Is Fading Faster Than Anyone Guessed,” Financial Post, April 2, 2019.)
Q1 Production Near High End of Guidance
Pioneer Natural Resources reported first-quarter net income of $1.2 billion, or $5.00 per diluted share. Excluding one-time unusual items, its adjusted earnings in the first quarter were $1.3 billion, or $5.21 per share. (Source: “Pioneer Natural Resources Reports First Quarter 2023 Financial and Operating Results,” Pioneer Natural Resources Co, April 26, 2023.)
The company’s cash flow from operations in the first quarter was $2.3 billion, resulting in free cash flow (FCF) of $948.0 million.
Pioneer Natural Resources maintains a solid balance sheet, with unrestricted cash on hand of $1.2 billion and net debt of $4.7 billion at the end of the first quarter.
Pioneer Natural Resources Co’s first-quarter total production averaged 361,000 barrels of oil per day, near the top end of its guidance. Its first-quarter total production averaged 680,000 barrels of oil equivalent per day, also near the top end of its guidance.
In the first quarter of 2023, the company’s average realized price for oil was $75.15 per barrel. Its average realized price for NGL was $27.30 per barrel, and its average realized price for gas was $3.79 per thousand cubic feet.
During the quarter, Pioneer Natural Resources Co placed 128 horizontal wells into production. It expects to put more than 100 15,000-foot lateral wells into production in 2023. For context, the development of wells with lateral lengths greater than 15,000 feet. It results in returns that are, on average, 20% higher than those from a 10,000-foot lateral well.
Pioneer Natural Resources Co’s CEO, Scott D. Sheffield, noted, “Pioneer reported an outstanding first quarter, achieving strong production growth and returning significant capital to shareholders.” (Source: Ibid.)
He added, “Our continued focus on efficient operations and the development of our best-in-class, high-return assets delivered production near the top end of guidance and generated approximately $950 million of free cash flow. This free cash flow, coupled with our strong balance sheet, supported $1.3 billion of shareholder returns through our second quarter base-plus-variable dividend of $3.34 per share and $500 million of opportunistic first quarter share repurchases.”
Business Outlook
For the second quarter, Pioneer Natural Resources Co expects to report average oil production in the range of 357,000 to 372,000 barrels of oil per day and average total production in the range of 674,000 to 702,000 barrels of oil equivalent per day. (Source: Ibid.)
In full-year 2023, the company expects to:
- Generate cash flow of $9.0 billion
- Operate an average of 24 to 26 horizontal drilling rigs
- Put 500 to 530 wells into production
- Produce 357,000 to 372,000 barrels of oil per day
- Produce a total of 670,000 to 700,000 barrels of oil equivalent per day
Management Hiked PXD Stock’s Base Dividend by 14%
Pioneer Natural Resources Co pays a base dividend of $1.25 per quarter, which is up by 14% over the $1.10 quarterly base dividend it paid in 2022. The company has increased its base dividend for the last six years.
In addition to the base dividend, it tacks on a variable dividend each month, which comes out of its cash flow. The variable dividends can really juice the quarterly payouts.
For example, in the first quarter of 2022, Pioneer Natural Resources stock paid out $3.78 per share ($2.68 variable). In the third quarter of that year, it paid $8.57 per share ($7.47 variable). In 2022, its total payout was $25.44 ($21.05 variable). (Source: “Dividends,” Pioneer Natural Resources Co, last accessed July 20, 2023.)
In the first quarter of 2023, PXD stock paid out $5.58 per share. In the second quarter, it paid out $3.34, for a current yield of 11.1%. That’s more than triple (273%) the current inflation rate of about three percent.
Pioneer Natural Resources Co Repurchased $500 Million Worth of Stock
In addition to paying high-yield dividends, Pioneer Natural Resources continues to make opportunistic share repurchases.
During the first quarter, the company repurchased $500.0 million worth of its own common stock at an average price of $206.00 per share. The board also authorized a new $4.0-billion common stock repurchase program. This new authorization replaces the previous $4.0-billion share repurchase program, which had $1.9 billion remaining on it at the time of the new authorization.
In conjunction with the base dividend increase and new stock repurchase program, the company refined its capital return structure. Under the modified framework, Pioneer Natural Resources Co expects to return at least 75% of its quarterly FCF to its shareholders through a combination of base-plus-variable dividends and share repurchases. The remaining 25% of the company’s quarterly FCF will be directed to its balance sheet.
The modified framework is peer-leading, returning significant amounts of capital to shareholders while providing the company with increased financial flexibility and additional balance sheet strength.
Pioneer Natural Resources Stock Has About 50% Upside
Oil and gas stocks were the biggest winners in 2021 and 2022, but it’s been a different story in 2023. Despite the oil production cuts by Saudi Arabia, investors are still focused on rising interest rates and a potential recession. This has, in part, kept a lid on oil prices. But the outlook for the sector is robust.
As you can see in the chart below, PXD stock has performed exceptionally well since cratering during the COVID-19 pandemic. Between mid-March 2020 (when Pioneer Natural Resources stock bottomed at $39.32) and May 2022 (when it hit a record high of $260.48), it registered a 562% gain.
Shares of Pioneer Natural Resources Co have retraced a little since then and have been, for the most part, trading in a tight range. As of this writing, they’re down by 3.6% year-to-date but up by 8.8% over the last 12 months, around $210.00 per share.
The outlook for PXD stock is bullish, with Wall Street analysts providing a 12-month share-price target in the range of $243.50 to $315.00 per share. This points to potential gains in the range of about 15.5% to 50%.
Chart courtesy of StockCharts.com
The Lowdown on Pioneer Natural Resources Co
Pioneer Natural Resources stock is a great oil and gas dividend stock with a growing ultra-high-yield payout and a new $4.0-billion share repurchase program.
The company reported “outstanding” first-quarter results, which included $950.0 million of FCF and production near the high end of its guidance. Furthermore, management provided solid guidance for the rest of this year.
The outlook for Pioneer Natural Resources Co is solid. The company has refined its capital return structure, which includes returning at least 75% of quarterly FCF to PXD stockholders through a combination of base-plus-variable dividends and share repurchases.
