Source: Pioneer Natural Resources; Sands Weems, photographer.
Pioneer Natural Resources (PXD 1.00%) recently reported pretty solid third-quarter results. Not only did the company's production surge, but it beat earnings expectations as well. That said, there are some worries that the good times won't continue to roll as oil prices keep slumping. Here's what the company's management had to say about those concerns.
Pioneer is bolstering its balance sheet
To make sure the company has enough money to continue to grow amid the slump in oil prices, it's bolstering its balance sheet. CEO Scott Sheffield noted:
The combination [of] selling $1 billion of equity ... with announcing the expected sale of our Eagle Ford Midstream business, it allows Pioneer to really prudently develop its assets in what I believe could easily be a $70 to $80 oil price environment over the next two years.
By selling stock and a non-core asset, the company will add enough cash to its coffers that it can fund its currently planned development program even if oil prices stay lower for the next two years.
Well-protected against oil price drops
Sheffield also noted that the company has locked in a lot of its production over the next year or so with a very strong oil hedging program:
Again, forecasting production growth in this lower price environment is 16% to 21% over the next two years. We have great hedges in place also, probably the best hedges in place among the industry in 2015 and '16 on oil.
Currently, about 85% of the company's production is hedged through 2015 and another 45% is hedged in 2016. That's one of the strongest hedge books in the oil industry.
Lower oil prices will boost demand
Sheffield doesn't expect oil prices to stay low for long. It's akin to a massive global economic stimulus program that will only spur demand in the future. He noted:
As you all know, the price of oil has dropped about $30 a barrel. It is $1 trillion stimulus per year to the world economy. It's going to take a while to get the demand side up in the world today.
Given the massive stimulus to the global economy, Sheffield, as well as many other peers, believes that oil prices will stay under $100 per barrel for no more than two years. This is because lower energy prices provide a lot of fuel to the global economy, which will only fuel increased demand for oil in the future.
Source: Pioneer Natural Resources; Sands Weems, photographer.
The U.S. can survive a price war with Saudi Arabia
Sheffield's two-year assumption is based on the fact that Saudi Arabia is reluctant to reduce its output:
At the same time, we're in a battle with Saudi Arabia in regard to market share versus U.S. shale oil.
Saudi Arabia thinks it can weaken U.S. producers by engaging in a price war. However, costs have come down so much that producers can survive the current weakness in oil prices and then thrive when oil prices head higher. Chief Operating Officer Tim Dove noted that the company can make strong returns in today's price environment by pointing out that "even in the $70 to $80 oil environment, we're looking at returns in the neighborhood of 40% to 80%." He also noted that the company is working to bring its costs even lower: "We are actively working with our service providers to seek cost reductions for 2015." As service providers cut their rates, it will lower the break-even costs of U.S. shale plays, meaning they'll make plenty of money even as oil prices are weak.
Exporting oil is its top priority
Sheffield's also bullish on the future of American oil because he is one of the leading advocates of exporting it. He said in his prepared remarks:
Also what's important, we've had multiple independent studies support lifting the oil export ban, in addition to the fact that gasoline prices would actually be lowered if we exported oil. The EIA came out last week, the very positive report in regard to saying that U.S. gasoline prices is governed by Brent oil and by world gasoline prices.
Here's a chart of what he's referring to from the U.S. Energy Information Agency:
Source: EIA.
Later on in the call he commented that the recent election results have him very optimistic that the U.S. oil export ban will be lifted later this year:
It's our No. 1 priority to get the export ban lifted next year in 2015. And so with what happened last night, and Senator Murkowski is going to run the Senate Energy Committee. I'm probably much more optimistic that something may happen in '15. We are making headways on both the Democrat and the Republicans, educating them.
Lifting the ban on exporting U.S. oil would raise the price of oil produced in the U.S. to the global oil benchmark, which is often much higher. It would unleash more production in the U.S., which would create more jobs and tax revenue, and even lower the price of gasoline, as gas prices are based on the higher global Brent benchmark.
Investor takeaway
Pioneer Natural Resources' management team wants its investors to know that it is in a very strong position to weather the downturn in oil prices. It's making moves to bolster its balance sheet to go along with one of the strongest hedge books in the industry. It sees the downturn as being temporary as the price decline is a massive global economic stimulus. Furthermore, management sees U.S. producers coming out on top, as drilling costs will go down while future oil exports could really open up the floodgates for profits when oil prices do head higher in the future.
