Pioneer Natural Resources (IL/A): Analyst meeting strategy in line; execution, exploratory drilling results key to outperformance - Goldman Sachs - March 10, 2006
We continue to rate Pioneer Natural Resources In-Line relative to an Attractive coverage view following the company's analyst meeting on March 9. While we believe the underperformance of Pioneer shares on March 9 was not warranted, the key to outperformance is delivering on, not just introducing, its strategy of double-digit growth and returns improvement. As we highlighted in our March 6, 2006 report, "Show me the probables," we have less confidence in Pioneer's unbooked resource inventory versus peers. Our view has improved regarding the potential for the Edwards Trend in South Texas, following disclosure of two initially successful wells. Ultimately, the results of drilling throughout this year at Edwards and the Rockies will be the key in determining ultimate growth, returns potential and longer-term F&D costs.
Key targets in line As expected, Pioneer introduced a double-digit 2006-10 production compound annual growth rate (we are assuming pro-forma growth of 11% in our estimates). 2006 pro-forma production of 33-37 MMBOE (versus our 35 MMBOE) and capital spending of $1.3 billion (versus our $1.2 billion) were in line. In the near term, we are more skeptical on the company's ability to be in the top quartile of returns this year relative to other E&Ps. Pioneer estimated its unbooked inventory at 650 MMBOE. This is above the 560 MMBOE unrisked unbooked resource we currently use to value Pioneer, mainly because it includes upside from CO2 flooding at the Spraberry field, Mannville CBM in Canada and further upside from Tunisia. In valuing Pioneer, we have more heavily risked resource potential from key exploratory opportunities - the Edwards Trend (South Texas), Lay Creek (Sand Wash Basin CBM), Columbine Springs (Piceance Basin CBM) and Castegate (Uinta Basin CBM). With greater evidence of commerciality from these plays - expected toward year-end - our mid-cycle and traditional peak values could increase and Pioneer shares would be more likely to outperform.
Sentiment negative and valuation increasingly attractive, though peers attractive as well We believe that the underperformance over both the medium term and short term have created relatively low hurdle rates for Pioneer. Management's decision to be more vocal in providing quarterly detail of production and key operating metrics by producing area is a positive sign that it is taking its new strategy and goals seriously. We see 58% upside to a $63 per share traditional peak value. However, we see similar levels of upside for other mid-cap conventional E&Ps. Our top pick among them remains Newfield Exploration (OP/A). For more details, please see our March 6, 2006 report on Pioneer, "Show me the probables."
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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 |
