Pioneer Natural Resources (IL/A): Near-term production issues could continue to restrain stock performance Goldman Sachs August 02, 2005
While we see upside to valuation for Pioneer Natural Resources (IL/A) based on a sum-of-the-parts analysis, we believe reaching fair value could continue to be negatively impacted by high offshore decline rates, near- term shut-in production in the Gulf of Mexico and a slowdown in Raton Basin production growth. While we continue to see a strong production growth opportunity from the Raton, we believe it may take further material exploration success outside the Raton or a shift in investor sentiment towards cash flow over growth for Pioneer to reach an estimated $46 traditional peak value. Among more conventional E&Ps, we prefer Newfield Exploration (OP/A) because the company has a diverse lineup of growth projects for the next three years while the stock trades at a discount to both Pioneer and other E&Ps.
SECOND HALF 2006 PRODUCTION DOWN SHARPLY DUE TO GOM DELAYS
The second half of 2005 production represents a perfect Gulf of Mexico storm for Pioneer, even before considering any future hurricane delays. Harrier has fully declined; Canyon Express is declining faster than expected with downtime expected before additional completions; the rampup at Devils Tower has been delayed; and we believe Falcon system production is falling at a rapid pace. Because of this, the company expects that even with some production back online from the shutdown of Fain natural gas processing plant, total company production before VPPs should fall to 168,000-182,000 barrels of oil equivalent per day (BOE/d), versus 191,000 BOE/d during 2Q 2005. We see 4Q 2005 production rising. However, we have reduced production estimates beyond 2005 to account for greater decline rates in the Gulf of Mexico and other adjustments.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Visibility for 2006 production growth. We believe that Pioneer's production will be flat to down in 2006, because the company will continue to suffer declines in the Gulf of Mexico without a major material growth vehicle aside from the Raton Basin. It is important to note that the Gulf of Mexico projects that are in decline both were the source of 36% and 20% total company organic production growth in 2003 and 2004, and that these projects are generating significant free cash flow. Nevertheless, the public markets today are focused on the combination of production growth and returns, and we believe that until the Gulf of Mexico/free cash flow comes into favor Pioneer shares could struggle until it finds sources of production growth.
(2) Exploration. We believe that exploration success would be a key catalyst for Pioneer shares in that it could improve production growth visibility going into the end of the decade. Much of the reason for Pioneer's volatility in its production profile has been due to volatility in exploration - because 2002 and 2003 were poor exploration years, the company's production growth suffered in 2004 and 2005E. The company continues to drill in the deepwater Gulf of Mexico and offshore West Africa. We would not expect a production impact from deepwater exploration until 2007 at the earliest, but believe that any success would be a catalyst for the stock.
(3) Credit given for Alaska and Argentina. Pioneer is investing time and capital in growing production from regions that presently are not receiving significant value - Alaska and Argentina. In Argentina, natural gas continues to sell below $1.00 per Mcf, while oil sells for about $34 per bbl. Nevertheless, because of low operating and capital costs we believe that Argentina does still contribute positively to profitability, though its contribution is essentially not levered to global commodity prices. The ability for the company to highlight its returns in Argentina could be one step towards receiving greater credit. In Alaska, Pioneer has increased is capital employed, which could impact production in 2008. Given many non-Majors' histories of delays and below-expected returns in Alaska, it may be closer to production startup before Pioneer is afforded significant credit for its investment.
2Q 2005 RESULTS BETTER THAN OUR ESTIMATE OUR AND CONSENSUS ESTIMATES
Pioneer Natural Resources reported 2Q 2005 EPS of $0.72, higher than our estimate of $0.42 and First Call consensus estimate of $0.66. Excluding one-time insurance proceeds, EPS would have been $0.53. Total oil and NGL production of 44.9 Mb/d and 17.5 Mb/d was slightly weaker than our expectations of 46.2 Mb/d and 22.7 Mb/d respectively, due to lower than expected US production. Including the effects of the volumetric production payments, overall gas production was in-line with our expectations. Overall realized oil prices were higher due to U.S and Africa prices of $29.36 per bbl and $51.84 per bbl versus our estimates of $26.05 per bbl and $47.10 per bbl, respectively. Overall gas price of $4.78 per MMcf was higher than our $4.70 per MMcf due to U.S gas prices of $6.02 per MMcf versus our $5.59 per MMcf. NGL realized prices were lower than expected. All-in costs came in slightly lower at $19.56 per BOE versus our $19.67, primarily due to DD&A that was $8.60 per BOE versus our expected $8.88. Operating cash flow of $390 million was greater than our estimate of $313 million. Net debt/tangible capital is at 36%.
UPDATED ESTIMATES
We have updated estimates to reflect changes in production and costs. We now estimate 3Q 2005 EPS of $0.54 ($0.79 previously). We now estimate 4Q 2005 EPS of $0.60 ($0.96 previously). Our full-year 2005 and 2006 estimates are now $2.43 ($2.74 previously) and $3.44 ($3.88 previously), respectively. For 2007-10 (normalized) we now estimate $1.47 ($1.78 previously), $1.67 ($2.02 previously), $1.92 ($2.31 previously) and $2.16 ($2.58 previously), respectively. Exhibit 1 shows our summary financial model for Pioneer.
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. |
