Pioneer Natural Resources (IL/A): Confidence in legacy onshore assets key for future performance - Goldman Sachs - November 03, 2005
The future trajectory of Pioneer Natural Resources shares will likely be a function of Street confidence in Pioneer's ability to show organic growth from onshore North America and free cash flow internationally. The company aggressively fulfilled its Sept. 1 share buyback promise, repurchasing all the initial $650 million program; Pioneer's in-line performance during Sept. and Oct. is slightly surprising considering buybacks represented an estimated 15% of average volume. With the pending sale of Gulf of Mexico assets, focus shifts to the running room of the US onshore. We see growth potential from emerging areas in the Rockies, though it is unclear how large these opportunities will be vs. legacy production in Texas/Mid- Continent. Among more diversified/conventional E&Ps, Pioneer (IL/A) trades at a premium multiple despite inferior returns, though it does have a longer asset life.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Completing asset sales in Gulf of Mexico/Argentina. Pioneer continues to pursue the sale of its Gulf of Mexico and Tierra del Fuego assets, which now include the recent Clipper discovery. Deepwater Gulf of Mexico assets have been in demand with the recent acquisition by Statoil of EnCana's Gulf assets and Norsk Hydro's proposed acquisition of Spinnaker Exploration, and we believe the Clipper discovery, the company's stake in the Thunderhawk discovery and its exploration blocks are attractive. The declining production profile from existing fields may be less attractive to other publicly-traded companies, while the ultimate valuation of Tierra del Fuego reserves remains to be seen. The net assets to be sold are estimated at about $600 million, and we believe that proceeds above $1 billion will be perceived positively. We expect that Pioneer will aggressively fulfill its promise to buyback an additional $350 million in shares at some point after a deal is struck.
(2) Growing US onshore. The company's coal-bed methane drilling in Canada's Horseshoe Canyon is proceeding well, and Pioneer is exposed to any potential positive developments in the Mannville coals. Additionally, the company is pursuing opportunities in the Uinta and Piceance Basins, though it is unclear what the ultimate potential could be from these areas. While these three regions are all high profile Rockies exploratory areas, the potential dent these could make on Pioneer's total US onshore production is also unclear. The bulk of production comes from the Spraberry, Hugoton and West Panhandle fields in Texas, Oklahoma and Kansas as well as the Raton Basin in Colorado. Raton Basin growth has been slower than expected, and it remains to be seen whether the company can grow production at at least a 15% sustainable rate. There has historically been less visibility from the three legacy fields. We believe that there will be greater detail provided during the company's February 2006 analyst meeting, but that ultimately showing production growth may be necessary.
(3) Harvesting international cash flows. Pioneer has seen positive newsflow from both Argentina (higher realized oil prices) and South Africa (the memorandum of understanding for future natural gas production). While the company remains active in exploration and development, especially in West Africa where a deepwater well will spud in December and could be a catalyst for the stock, we believe that maintaining stable free cash flow is key, especially as the company is likely to accelerate drilling in North America.
ADJUSTED EPS BEATS OUR AND CONSENSUS ESTIMATES
Pioneer reported 3Q 2005 adjusted EPS of $0.74, higher than our estimate of $0.57 and First Call consensus estimate of $0.72. Operating cash flow was $352 million versus our $300 million estimate. Total production when adding production from volumetric production payments was higher than expected at 177,000 BOE/d versus our 179,000 BOE/d estimate, while realized commodity prices were also higher than expected. All-in costs were in-line. Pioneer's net debt/tangible capital is now 51% versus 36% last quarter, though we expect a decline in leverage once the Gulf of Mexico/Tierra del Fuego assets are sold.
UPDATING ESTIMATES
We are updating our estimates to reflect slight changes to production, updated hedges and the impact of the timing of stock buybacks. Our 4Q 2005 and full-year EPS estimates are $0.95 ($0.96 previously) and $2.97 ($2.80 previously) respectively. Our 2006 and 2007 estimates are $4.47 ($4.46 previously) and $5.42 ($5.62 previously) previously. Our 2008-2010 (normalized) estimates are $1.98 ($2.09 previously), $2.47 ($2.54 previously), and $2.79 ($2.87 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. |
