Pioneer Natural Resources Co. (PXD): Use of cash remains key focus as Alaska, S. Africa projects begin - Goldman Sachs - 11/07/07
What's changed
Pioneer reported EPS of $0.62 versus First Call consensus of $0.57 and our $0.55. Total production was 739 MMcfe/d, including VPP production versus our 743 MMcfe/d estimate. Operating cash flow was $304 million versus our $212 million estimate. The company indicated it expects to spend $1 billion in 2008, below our estimate.
Implications
The announcement of a relatively low capital budget for next year is initially a positive, as it should allow Pioneer to live within its cash flow, a major point of Street criticism over the past two years. Ultimately, however, the Street has been skeptical on Pioneer’s investment opportunities and capital allocation, and the risk is that Pioneer uses its greater balance sheet flexibility to make acquisitions that are not deemed favorable. With the Street seemingly more willing to give selected credit to repeatable drilling opportunities in more conventional areas, further positive well results and growth in the Edwards Trend could help the stock. Pioneer’s growth is becoming more visible with near-term production ramp-ups in South Africa and Alaska.
Valuation
Pioneer trades at 7.1x 2008 EV/debt-adjusted cash flow, versus a 6.1x -7.7x range for other longer lived small- and mid-cap E&Ps. We see 9% upside to a $59 12-month target price, which is based on discounted cash flow analysis, versus 14% upside for peers. We continue to rate Pioneer Neutral relative to an Attractive coverage view. Our 2007/2008 EPS is now $1.99/$3.60 from $1.97/$3.93.
Key risks
Commodity price volatility, drilling results, cost pressures and government pronouncements are key risks. |
