Pioneer Natural Resources (PXD -1.55%) doesn't disappoint the market that often. On the contrary, the company has a history of exceeding expectations, which is what it largely did during the first quarter. Overall, production grew 3% versus the fourth quarter, averaging 249,000 barrels of oil equivalent per day (BOE/d), which was above the top-end of the company's guidance range. That expectation-beating output enabled Pioneer to earn $0.25 per share, which was $0.09 per share ahead of the analysts' consensus.
That said, the company issued rather disappointing guidance for second-quarter output. Further, it reduced the full-year outlook for oil as a percentage of total production. That weaker-than-expected forecast caused investors to worry if there's more disappointment on the horizon for Pioneer. However, as the company clearly points out, there's no reason to worry because its "disappointing" outlook has very simple explanations.
Drilling down into the outlook
Pioneer said that it expects to produce an average of 254,000 BOE/d to 259,000 BOE/d during the second quarter, which at the midpoint is up 3.1% from the first quarter. However, the projection is a bit below the consensus estimate that the company's output would average 262,000 BOE/d. While that below forecast outlook disappointed the market, there's one important factor driving the company's guidance: timing.
Pioneer noted that it plans to complete 60 to 65 wells during the second quarter, which is up from 38 during the first quarter. However, CEO Tim Dove noted something imperative about how those wells will impact production on accompanying conference call. Dove said that,
You might expect [output] to be higher in a scenario where you just calculate up the impact of certain number of [wells completed] in the second quarter compared to the first. But the fact is just the way the rig schedule works, the vast majority of those [completions] are in May and June, so we don't get as much of an effect as you might expect from the actual number of [completions]. We'll see a bigger effect in the third quarter.
While analysts expect more production from the company, that's the result of some incorrect assumptions on the timing of when new wells will come online. It's an impact Pioneer fully anticipated when it put together its full-year guidance, which is why it isn't making any changes to its forecast.
Making sense of the oil impact
The other number that caused investors some concern was a decrease in the forecast for oil as a percentage of production. Initially, Pioneer expected that 62% of total output this year would be oil. However, the company now sees that number averaging 60%. On the surface that would seem to suggest that the company is drilling more gassier wells than anticipated, which would mean lower margins.
However, the company had a few simple explanations for the reduced outlook. First, it recently sold some non-core acreage that produced an average of 1,500 BOE/d. What's noteworthy about that output is that it was oilier production, averaging 80% of the total. Meanwhile, the company also noted that it recently switched to a third-party gas processing plant in one region, which will result in the processing of 1,000 barrels per day of light condensate that would then get recognized as NGL production.
Is there a disappointment lurking on the horizon?
That said, there is one thing that should concern Pioneer investors, which is that it needs higher oil prices to fuel its long-term growth forecast. The company noted that it plans to outspend cash flow this year to fuel a 15% to 18% increase in production, which would put it on pace to live within cash flow starting next year, with one caveat: oil needs to average $55 per barrel. That's a potential problem because oil has been sliding of late, recently falling to around $46 per barrel due to rapidly rising shale output from companies like Pioneer. Unless oil rebounds, it's possible that Pioneer might need to tap the brakes on its long-term growth plan to boost production 15%+ annually through 2026.
Pioneer's need for higher oil prices to fuel its growth plan puts it at a disadvantage to rivals with lower break-even points. For example, EOG Resources (EOG -1.70%) can live within cash flow at just $50 oil in 2017 and beyond. In fact, EOG Resources anticipates increasing its oil production 18% this year while living within cash flow at $50 oil. Meanwhile, the company can boost its oil output by 15% per year through 2020 and pay its current dividend while living within cash flow at $50 oil. Because of that, EOG Resources can grow faster than Pioneer in the future if oil stays lower for longer.
Overall, Pioneer Natural Resources delivered another expectation-beating quarter. Meanwhile, its "disappointing" outlook was nothing more than a timing issue and the impact of two strategic decisions to maximize the value of the company's assets. However, there's still the possibility for a disappointment down the road because the company needs $55 oil to fuel its long-term growth plan, which at the moment looks like wishful thinking.