MarketWatch article for PXD:
Market slow to see value in Pioneer
Debt worries weigh on independent oil explorer
By Lisa Sanders, CBS.MarketWatch.com
Last Update: 3:01 AM ET June 28, 2001
IRVING, Texas (CBS.MW) -- Fund manager Bill Church has been waiting
for the market to recognize the value of Pioneer Natural Resources for two years.
After all, with a highly regarded exploration team and a slew of drilling
successes the company's shares could be expected to thrive in the
back-from-the dead energy exploration business.
But Church, who manages the SG Cowen Small Cap Portfolios, is still
waiting for a market that can't seem to see its way past the company's huge
$1.5 billion debt load.
"The stock is cheap because it hasn't been recognized," Church said. "This
is one of the few companies that will have increasing production and
increasing cash flow in 2002. This is a growth company."
Investors continue to penalize Pioneer (PXD: news, msgs, alerts) , giving the
stock a price-to-cash-flow ratio of 4.2 vs. about 4.8 for independent rivals.
Others in the group, such as Apache (APA: news, msgs, alerts) and Triton
Energy (OIL: news, msgs, alerts) , carry considerably lower debt burdens.
Pioneer shares lost 63 cents to close at $17.51 on Wednesday. The stock
hit a 52-week high of $23.05 on May 16.
Scott Sheffield, chairman, president and CEO of Pioneer, is sanguine about
the company's ability to carry and service its obligations. The debt is a
holdover from the 1997 merger of T. Boone Pickens' highly leveraged Mesa
Petroleum with Sheffield's former company Parker & Parsley. The two
companies joined to create Pioneer.
Sheffield points out that the company has already cut its debt burden from
$2.2 billion 18 months ago. In addition, Pioneer's cash flow should reach
$500 million net this year, which it will use to further reduce debt. Sheffield
also intends for the company's obligations to reach investment grade status within a year.
"The key to this industry is making investments that exceed the cost of capital.
We've had a lot of success, and the stock will get rewarded over the next 24 months,"
he said in an interview from the company's Irving, Texas, corporate headquarters.
"We have a long-life asset base and our production will last another 30 to 40 years."
Nearer term, "with high commodity prices, Pioneer is in a position to exploit their
assets rather than sell them to reduce debt," Church said. He adds he likes to own
Pioneer because of Sheffield, who made money for Church at Parker & Parsley.
Talent pool
The talent at Pioneer draws many of the company's accolades. The company's
been able to draw geoscientists and engineers from major oil companies,
who became frustrated with corporate bureaucracies. Pioneer offered an
organization that encouraged open communication, Sheffield said.
That's what appealed to Chris Cheatwood, senior vice president of exploration,
who left Exxon in 1997 to work for Pioneer.
"Most of these people (at Pioneer) were very highly-regarded where they
came from, and they were well compensated," Cheatwood said.
"But they just weren't allowed to contribute to the bottom line, and
there were all these layers of management you had to deal with."
By contrast, "Here, people are directing the bottom line every day,
and a large part of their compensation is tied to the bottom line,
so they're directing their own future," Cheatwood aid.
"Everybody's having fun, and it's exciting."
That atmosphere has bred success in the field.
"We probably have the best growth profile of production over
the next 24 months of the independents
because we've made some huge investments in discoveries
coming on in 2002 and 2003," Sheffield said.
The biggest project is Canyon Express in the Gulf of Mexico.
It's the largest deepwater project in the world and it's natural gas.
Pioneer owns 18 percent.
Canyon Express "will contribute more to the U.S. natural gas
supply side in the next 24 months than any other project coming on,"
Sheffield said. The field is expected to gross 500 million cubic feet of gas
a day. Other owners are British Petroleum (BP: news, msgs, alerts) ,
USX-Marathon (MRO: news, msgs, alerts) and TotalFinaElf (TOT: news, msgs, alerts) .
Drilling success
What's also exciting to Frost Securities analyst Lewis Ropp is the
company's level of success when drilling in the deepwater Gulf.
Pioneer has now drilled five successful wells out of seven attempts.
"What people didn't recognize is that Pioneer had put together this
exploration team," Ropp said. "Their reputation on the Street was that
they were just a development company with slow growth prospects" in
its older properties in Texas and Oklahoma.
In addition to Canyon Express, Pioneer has discovered,
among other finds, oil in South Africa and in
Gabon in West Africa.
Ropp believes that Pioneer has a net asset value of around $32 a share.
He rates the stock a "strong buy" and has a $34 target price.
"As people recognize that they are having this type of success,
they have the exploration talent, and they have the prospect inventory,
they will attract investors," Ropp said.
They may also attract larger companies that want to acquire Pioneer.
Sheffield declined to comment on whether the company's been approached.
But "if someone offers a tremendous price, we'd have to evaluate it." |
