Pioneer Natural Resources: What's Not to Like But the Price?

Over the last couple of years, Pioneer Natural Resources  (NYSE: PXD  ) has quickly developed into an oil major with a massive reserve base in the Permian Basin. Unfortunately, the company has garnered a stock valuation that equally matches the potential for production growth. At $28 billion, the stock now trades for seven times expected 2014 revenue.

After the divestiture of Alaska and Barnett shale assets, Pioneer Natural Resources is now focused on developing the Permian Basin and Eagle Ford Shale acreage with a net recoverable reserve potential of more than 10 billion barrels of oil equivalent.

The lessons of Chesapeake Energy (NYSE: CHK  ) and comparable valuation of Continental Resources  (NYSE: CLR  ) suggest investors need to proceed with caution. The company might need years of production growth to live up to the current valuation.

2013 production
Pioneer Natural Resources grew 2013 production by 12% when excluding the divested assets. Total fourth quarter production averaged 164 Mboe/d, led by strong growth in the Spraberry/Wolfcamp and Eagle Ford Shale. Production totals in the quarter were hampered by extreme weather in Texas that shut in over 50% of the more than 7,000 wells in the Spraberry and Wolfcamp area. The reduced production limited growth to just above the 161 Mboe/d produced for all of 2013, but the restart of these wells provides immediate upside for 2014 production.

These production totals compared to 144 Mboe/d for Continental Resources and over 600 Mboe/d for Chesapeake Energy. Continental Resources saw production soar 39% over last year due to a significantly larger $3.6 billion capital expenditures budget. On an adjusted basis that accounts for divestitures, Chesapeake had a slight gain in production.

Doubling production  
One thing that has gotten investors excited about Pioneer Natural Resources is the projection that it expects to more than double production by 2018 compared to those 2013 totals. The numbers appear achievable considering the substantial reserves and the ability to expand the northern Spraberry and Wolfcamp drilling program from five rigs at year-end 2013 to 16 rigs by the end of the current quarter. The vertical well program is seeing a reduction in wells drilled that will reduce production by 10% this year, but in total the capital expenditure program is jumping to $3.3 billion from only $2.8 billion last year.

It might not take that long for Continental Resources to double 2013 production levels. The company forecasts production increasing around 29% in 2014 and is part of a five-year plan to triple production. With proved reserves now exceeding 1 billion barrels of oil equivalent, it wouldn't be a surprise to see dramatically higher production totals. The best part about the reserves is that 68% is crude oil. The only noticeable problem is the constant large differential (discount to WTI crude inclusive of transportation) obtained for the Bakken oil was $13 per barrel during the fourth quarter and is constantly lower than market rates.

Again, Chesapeake isn't focusing that much on production growth with a shift toward shoring up the balance sheet and self-funding the drilling program. The company still expects to generate roughly 10% organic growth with a $5.5 billion capital expenditure budget. Proved reserves only grew 2% over last year, but it sits at a very solid 2.7 Bboe.

Bottom line
While investors are now excited about the prospects of the Permian Basin and the growth potential of Pioneer Natural Resources, the valuation is now stretched. Continental trades more favorably on about all metrics and in both cases investors need to be reminded that production growth can't extend into eternity. The current valuation of Chesapeake is a prime example of what happens to a stock when a decade of fast growth comes to a halt and commodity prices turn against he company.

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