Image source: Apache Corporation.
No company has outmaneuvered the oil market downturn better than Pioneer Natural Resources (PXD -0.55%). Thanks to strong oil hedges, an excellent balance sheet, and prudent asset sales the company has had the capital it needs to continue to develop its premier position in the Permian Basin. That position has not disappointed but instead has been the gift that keeps on giving with Pioneer figuring out ways to coax even more oil out of its tight rocks than it thought possible. That has allowed the company to surprise investors time and again, with its second quarter just another in a long line of pleasant surprises.
1. Surprise! We beat our production guidance again
In what is becoming a recurring theme, Pioneer Natural Resources beat its production guidance during the second quarter. The company projected that its output would be between 224,000 barrels of oil equivalent per day (BOE/d) to 229,000 BOE/d. However, its actual production averaged 233,000 BOE/d, which is 5% higher than last quarter.
The company's latest well completion design is driving this outperformance. Production on wells utilizing its version 2.0 completion design is up 35% in its northern area and 25% in its southern area. Meanwhile, the initial results of its version 3.0 design have production trending above the prior version, which suggests that future wells could deliver even more production than anticipated.
2. Surprise! We are boosting our growth forecast again
Because its output was above guidance, it probably shouldn't be a surprise to see the company raise its full-year outlook. Still, with many producers just struggling to maintain production, it is surprising to see Pioneer growing so rapidly. In fact, the company now expects to increase its production by 13% this year, which is up from its expectations for 12% growth last quarter and its initial projection for 10%+ growth in 2016.
To put that into perspective, rival independent driller Apache (APA -0.75%) expects its production volumes to decline between 7% and 11% in 2016. That is worth noting because Apache is more than twice Pioneer's size by measuring daily production volume. However, despite its larger size and relatively healthy balance sheet, Apache refuses to outspend cash flow this year to even keep its production flat.
3. Surprise! We will be cash flow neutral by 2018 at $55 oil
Pioneer Natural Resources, on the other hand, does not have any qualms about outspending its cash flow this year to drive growth. In fact, the company only expects to generate $1.5 billion in operational cash flow while it is planning to spend $2.1 billion on capex. That said, it has little debt and recently received a $500 million cash infusion from an asset sale to bridge the gap between capex and cash flow.
That gap, however, is projected to shrink to zero by 2018 at a $55 oil price even as the company's plans to grow production by 15% per year for the foreseeable future. In fact, Pioneer projects that it can easily increase its production 15% per year through the end of the decade while maintaining a minuscule leverage ratio. The company's prime position in the Permian, as well as its ability to get more oil out of its acreage through innovative well designs, is what's making this bold outlook possible.
Investor takeaway
Pioneer Natural Resources continues to defy the oil market downturn. While most of its peers are not even maintaining their production, Pioneer Natural Resources is accelerating its growth rate. It has no plans of slowing down, with it currently on the trajectory to continue its double-digit pace through the end of the decade even if oil does not budge all that much.
