While 2017 hasn't gone as Pioneer Natural Resources (NYSE: PXD) thought it would, the company has still delivered solid results. The recently completed third quarter wasn't any different as the shale driller smashed analysts' expectations despite several headwinds. That sets the company up for continued strong performance in the coming years.
That future was the focus of CEO Tim Dove's comments on the accompanying conference call. Overall, he made three points that made it clear that Pioneer has no plans to slow down.
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1. We're on track with our 10-year plan
One reason 2017 hasn't gone like Pioneer thought was that it ran into a drilling issue during the second quarter. As a result, the company tapped the brakes on its growth expectations, stating that production would come in at the low end of its guidance range. However, despite that speed bump, Dove made it clear that "we continue to be on target to meet all of our growth goals, both for the fourth quarter and for all of this year, 2017." He said:
In other words, Pioneer still fully expects to achieve its ambitious 10-year plan to organically increase production up to 1 million barrels of oil equivalent per day by 2026. Furthermore, Dove noted that the company could fully support that program with its existing acreage because low-cost oil and gas saturate the rocks beneath its land. That gives it full confidence that it can continue increasing output by a more than 15% annual rate for the next nine years.
2. We're heading toward cash flow breakeven at $50 a barrel
One noteworthy aspect of Pioneer's plan is that it's more aggressive because the company can't currently finance its strategy with cash flow. However, as Dove noted:
While he notes that Pioneer could grow within cash flow this year, it needs oil in the upper $50s to make that happen. That's well above the breakeven levels of rivals Marathon Oil (NYSE: MRO) and Encana (NYSE: ECA), which can both deliver their long-term growth plans at $50 oil. In Marathon's case, it can increase output at a 10% to 12% compound annual rate and pay its dividend at $50 oil. Meanwhile, Encana's plan would see it outspend cash flow this year before generating excess cash over the next several years, with it projecting a cumulative $1.5 billion surplus by 2022. That said, while Pioneer plans to outspend cash flow for the next few years, it does have a strong balance sheet with $2.1 billion in cash and minimal debt, so can afford to keep its foot on the gas.
3. Exporting is becoming a crucial component of our plan
However, Pioneer isn't just hoping oil stays higher so it can balance spending with cash flow. Instead, Dove noted that it's working to generate more cash flow in the current market environment by becoming "[a] very significant player in world export markets." He added:
Increasing the volume of crude Pioneer exports will enable the company to capture a much higher price for its oil. That's because the global oil benchmark, Brent, currently trades for around $63 per barrel while the U.S. oil benchmark, WTI, sells for about $56 a barrel. So, by exporting more volumes, Pioneer can pocket this nearly $7-per-barrel spread. To put that in perspective, if Pioneer hits its export goal of 100,000 barrels per day, it could collect an incremental $250 million per year, getting it even closer to breaking even in the current pricing environment.
Comfortable standing out from the crowd
The central theme of Dove's comments on the call is that Pioneer has no intention of changing its long-term growth strategy. The company still plans to become a million-barrel-day producer by 2026, even if that makes it seem more aggressive when compared with rivals like Encana and Marathon, which plan to live within cash flow at $50 oil. That said, Pioneer's plan could pay off big-time if crude prices soar in the coming years, which is upside the company doesn't want to miss.
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