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Will Permian Basin Drillers Maintain Their Scorching Hot Pace in the Second Quarter?

By Matthew DiLallo – Aug 1, 2017 at 6:31AM

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Permian-focused drillers will likely report gushing production numbers this week.

The Permian Basin has been heating up over the past year as drillers pour billions of dollars into the legacy oil play to lock up land and drill new wells. These investments are fueling big-time growth for producers even in the current low oil price environment thanks to the excellent returns drillers can earn on new wells. That trend isn't expected to abate during the second quarter, which has Permian producers primed to deliver strong results once again. Here's a quick look at what to expect from some of the top players when they report second-quarter results later this week.

Don't be surprised if Pioneer underpromised and then overdelivered

Last quarter analysts were a bit underwhelmed by Pioneer Natural Resources' (PXD -0.11%) guidance for the second quarter. That's because the Permian driller anticipates production coming in between 254,000 to 259,000 barrels of oil equivalent per day (BOE/D), which was below the consensus that it would produce 262,000 BOE/D. However, the company noted that this was due to the timing of when it expects to complete new wells, and not due to weaker well productivity. That said, Pioneer has a history of outperforming its guidance, which was the case last quarter when output came in 1,000 BOE/D above the top end of its guidance range, enabling the company to earn $0.25 per share, which was $0.09 per share above expectations. Because of that, it wouldn't be a surprise to see the company outpace expectations again when it reports its second-quarter earnings this week.

Oil pump during a beautiful Texas sunrise.

Image source: Getty Images.

Expect continued robust organic growth

Diamondback Energy (FANG 0.38%) is on pace to deliver explosive production growth this year of 65% at the midpoint of its guidance range. While a needle-moving acquisition last year is one of the drivers, the other is the company's impressive organic growth pace. Last quarter, for example, Diamondback Energy delivered 13% quarterly organic growth as it ramped up drilling and well-completion activities. That high-margin growth enabled the company to earn $1.04 per share, which was an eye-popping $0.44 per share ahead of expectations. Given its torrid organic growth pace, it's likely that the company will once again blast past expectations when it reports results this week.

A low hurdle to jump

Concho Resources (CXO) also delivered expectation-trouncing first-quarter results thanks to its prime Permian position. Overall, the company earned $0.49 per share, which was a gaudy $0.20 per share ahead of the consensus estimate because production came in above the high end of its guidance range. One of the drivers was a 13% organic increase in output, which brought Concho's total to 181,400 BOE/D for the quarter. That said, like Pioneer, Concho's guidance is that organic growth won't be quite as robust in the second quarter given its projected range of 182,000 to 186,000 BOE/D. However, because of those somewhat muted expectations, it wouldn't be hard for the company to outpace expectations again when it reports second-quarter results later this week, as it would only take a couple of exceptional wells to do the trick.

Another beat looks to be in the bag

Parsley Energy (PE) also delivered expectation-beating results in the first quarter when it earned $0.13 per share, which was $0.04 per share ahead of expectations thanks to a 21% increase in output versus the prior quarter. Those strong results enabled the company to increase its full-year guidance, which at the midpoint would see production skyrocket 78%. That said, thanks to robust well results in the second quarter, the company recently increased its full-year guidance by 4.6% at the midpoint. That makes it highly likely that Parsley Energy will beat earnings expectations when it reports second-quarter results this week.

A drilling rig in the Alpine High play.

Image source: Apache Corporation.

It's all about Alpine High

Apache (APA -1.48%) was one of the few Permian-focused drillers that missed expectations last quarter; its $0.08-per-share result came in $0.05 per share below the consensus estimate. That said, Apache is a bit farther behind some of its Permian peers because its focus is on developing the recently discovered Alpine High play, which is in a previously forsaken spot in the Basin. Because of that, Apache has had to build infrastructure from scratch, which is holding back its ability to develop the play. However, the company recently finished construction of the first section of a new gas pipeline, which should allow it to start opening the taps. As such, the key for Apache this quarter is to show the world that Alpine High is living up to its potential by delivering strong well results that prove this play can be the growth driver the company believes it can be.

Muted expectations could yield some big moves

For the most part, analysts have muted expectations for Permian drillers in the second quarter. That's because the industry is not only going up against some pretty gaudy comparable numbers, but also many producers don't expect to complete as many wells due to timing. That said, Permian producers have a history of exceeding expectations, which could drive big gains in their stock prices this week if they deliver repeat performances.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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