5 Critical Things Pioneer Natural Resources' Management Wants You to Know

By Fool.com

Courtesy of Pioneer Natural Resources, Sands Weems-Photographer.

It has been a rough couple of months for oil companies like Pioneer Natural Resources . That was evident by the company's recent earnings report as lower oil prices resulted in weaker earnings. The turn in oil is now forcing the company to change its plans as it adjusts to this new reality.The company's managementelaborated on the current oil market as well as the changes it's makingto its business plan on its recent quarterly conference call. Here are the five most important things management said on that call.

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Still makin' moneyDespite weak oil prices Pioneer Natural Resources is still making money drilling new oil wells. In fact, because its costs have come down about 10% so far, its returns are actually improving even though oil prices aren't. CEO Scott Sheffield noted this by saying that, "We're delivering great returns, both in Eagle Ford, up to 70%, and both in the south and the north in our Spraberry/Wolfcamp areas, up to 55%." These strong drilling returns are driving the company's ability to grow production next year even though the price of oil is weak.

Cutting back... for nowHowever, despite those strong returns, Pioneer Natural Resources still needs to cut back. This is why it announced that it was cutting its rig count in half and reducing its capital spending plan by 45% in response to lower oil prices. The company simply isn't yet comfortable with spending more than its cash flow when it believes it can get better returns in the future should the oil price improve or oil-field service costs come down some more. So, while its official budget for the year calls for a 50% reduction in rigs it is leaving the door open to add rigs later in the year. Sheffield thinks that either costs will go down further, or the oil price will improve so that it would make sense to add rigs later in the year. He noted this by saying,

Pioneer is purposefully growing slower than it could in order to accelerate its drilling either later this year or early next year when it can earn an even higher return. That flexibility should create more value for investors than if the company simply continued to drill now just to keep drilling.

Optimistic about a second half rally in oil pricesWhile the price of oil is depressed right now, that's entirely due to an oversupply of oil in the market as demand hasn't been as robust as expected. However, that oversupply could be worked off sooner than anyone expects because of the potential for oil production in the U.S. to decline because of how rapidly production drops from shale wells.

U.S. oil producers have rapidly cut drilling rigs. Sheffield sees this leading to a retreat in U.S. oil production later this year, which is bullish for the price of oil. He said that,

As of the end of last week the U.S. rig count was down 342 from its peak and at the lowest level since December of 2011. This caught the eye of OPEC, which cut its production growth forecast by a third as it sees the oil glut slowly starting to ease. This suggests that the price of oil could pick up. This would be welcomed news as a higher oil price is needed in order to encourage companies like Pioneer to add more drilling rigs in order to keep oil production from dropping too far and creating a shortage.

Strength during storm and ready to pounce when it endsPioneer Natural Resources isprepared to patiently wait out the storm in the oil market. It has a very strong balance sheet, which is a rarity among energy companies, so that it can just sit back and wait until oil market conditions improve. Sheffield detailed the company's prime position by saying that,

Because of its position of strength the company can simply wait things out and then accelerate its activity when market conditions improve.

OPEC is making shale drilling cheaperOne more interesting comment that the company made, this time by COO Time Dove, was that the OPEC shift from protecting oil prices to protecting its market share could have unintended consequences down the road by making shale drilling cheaper. Dove noted that,

What he's saying is that by allowing the price of oil to deflate OPEC also is deflating some of the industry's costs, such as for oil-field services. Because of this, shale drilling, which has been getting cheaper every year, is now going to see that trend accelerate so that it will be a lot more profitable at lower oil prices. That's good news for the industry over the longer term as it can make more money even at a lower long-term oil price.

Investor takeawayWhile the downturn in the oil market has put Pioneer Natural Resources' ambitious growth plans on hold, it hasn't stopped the company from still making decent money. In fact, the company sees the current issues in the market as a long-term opportunity to get costs lower so that it can improve its returns. That's why it's holding back for now and planning to accelerate its growth when it can make more money doing so.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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