Pioneer Natural Resources (IL/A): Restructuring a positive step with onshore growth, execution key Goldman Sachs September 01, 2005
We believe that the restructuring announced by Pioneer Natural Resources is a positive step towards receiving greater value for its diverse set of reserves. With sector valuations having moved up, a sum-of-the-parts net asset value suggests a $54 per share value with upside depending on ultimate growth potential from key onshore US fields. However, Pioneer's decision to authorize a $1 billion additional share buyback and sell its Gulf of Mexico operations still leaves key unanswered questions that could prove to be future stock price drivers. We believe that key drivers of Pioneer shares will be to what extent greater onshore spending will increase production growth, the potential value of and interest in Argentina gas assets, and Street confidence in management's willingness to execute its buyback. We rate Pioneer In-Line relative to an Attractive coverage view.
SHARE BUYBACK ADDS CLARITY IN USE OF CASH, THOUGH EXECUTION IS KEY
Pioneer's $1 billion share buyback authorization and increased dividend show management's thought process in its use of free cash flow. However, as with any authorized share buybacks, the key is management's commitment to execution. Management indicated it expects to buyback $650 million by yearend and $350 million following successful divestitures. We believe it remains key that management shows resolve, even in the face of share price volatility, in acquisition opportunities or exploration success. While it is certainly understandable that management wants financial flexibility to take advantage of new developments, we believe that investors focused on use of free cash will want to see action in addition to words.
SALE OF CONTROVERSIAL ASSETS COULD END CONTROVERSY OVER VALUATION
We believe that the pending sale of assets in Argentina (about 30% of its Argentina production) and the deepwater Gulf of Mexico (Pioneer will keep its shallow Gulf of Mexico assets) could end controversy over how these assets should be valued. We have been skeptical on both returns and asset value for Argentina natural gas reserves, while Pioneer management has been very bullish on prospects in Argentina, which does make the sale surprising to us. Every $0.25 per Mcfe of value afforded Pioneer's total proved reserves in Argentina would result in an estimated $1.50 per Pioneer share (assuming the share buyback). In the Gulf of Mexico, Pioneer's discounted valuation has been largely a function of both natural declines in GOM production as well as a seemingly regular flow of production issues that have caused downtime to key platforms. In both Argentina and the Gulf of Mexico, Pioneer has additional acreage that holds exploration potential. In the Gulf of Mexico, it is important to note that there are no major discoveries on acreage for sale. In Argentina, natural gas prices are the lowest in Tierra del Fuego considering the transportation necessary to get to the Buenos Aires area for consumption.
We estimate about 400 Bcfe of proved reserves are for sale, of which 40% is from the Gulf of Mexico. Additionally, the company is selling its 12.5% interest in the Thunderhawk discovery and other unbooked discoveries. Assuming $3.00 per Mcfe for estimated Gulf of Mexico proved reserves, lower amounts for probable reserves and $0.25 per Mcfe for estimated Argentina proved reserves for sale, asset sales could be about $700 million in pre-tax proceeds. While we would not expect US companies to be interested in assets in Argentina, national oil companies such as Petrobras or regional players such as Repsol could find Pioneer's assets synergistic.
RELATIONSHIP BETWEEN GREATER ONSHORE SPENDING AND GREATER GROWTH KEY TO STOCK
Once asset sales are complete, the key catalyst for Pioneer shares will be the ability to show onshore production growth, given Pioneer's announced increase in onshore capital expenditures. Much of the volatility in Pioneer's production in the past two years has been due to varying issues with offshore production. Without that, we believe there should be greater visibility for growth that should lead Pioneer to provide greater disclosure/guidance. Pioneer's key onshore fields - Spraberry, Hugoton and Raton - have long reserve lives and seemingly have the potential to underpin multi-year growth. The ability for Pioneer to execute on this growth is key to stock price performance. A key driver of Pioneer's onshore success is the company's unconventional gas expertise. As a recent entrant to unconventional gas with the acquisition of Evergreen Resources in 2004, Pioneer now is pursuing tight gas opportunities in the Piceance Basin, Uinta Basin, Horseshoe Canyon and other areas in the Rockies.
SUM OF PARTS EXCEEDS $50 VALUE; CONTINUE TO BELIEVE MINIMAL VALUE AFFORDED TO LONGER TERM PROJECTS SUCH AS ALASKA
With rising valuations among oil and gas peers, Pioneer continues to be one of the companies that trades at a very low multiple of proved reserves ($1.31 per Mcfe of expected yearend reserves), though at an average multiple of cash flow versus other E&Ps (6.1x 2006E EV/debt-adjusted cash flow). Our sum-of-the-parts valuation now stands at $54 per share, which could rise depending on the value afforded to Argentina, and the growth potential/probable reserves at the Spraberry field, and reserve adds from 2005 capital spending. We continue to believe that minimal value is being afforded Pioneer's longer-term projects such as Alaska, and greater visibility for production startup could be a positive catalyst for the stock.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. |
