Pioneer Natural Resources (NYSE:PXD) reported earnings this past week, and the market took to the news like a cat to water. In this week's episode of Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman dive into the report and explain what exactly had the market so up in arms, and what it means for the company in the future.

The analysts look at earnings out of First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), which sent the stocks soaring by double-digit percentages in opposite directions this week, as well as reports from Royal Dutch Shell and BP that the big oil giants are going to produce at $50 a barrel for the foreseeable future.

A full transcript follows the video.

This video was recorded on Aug. 3, 2017.

Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, Aug. 3, 2017, so we're talking about energy and industrials. I'm your host, Sean O'Reilly, and in studio with me is my podcasting partner in crime, Mr. Taylor Muckerman. What's up, player?

Taylor Muckerman: Ta-dah! What's happening?

O'Reilly: Interesting things in the oil sector are happening.

Muckerman: Yeah, some bottoms falling out.

O'Reilly: We have a good show for you guys, folks. That's my late-night host intro. We've got a good show for you.

Muckerman: You have to keep them around. You can't let them turn us off right away.

O'Reilly: Today, for our listeners, we're discussing major changes being made by the world's biggest oil companies and how they're planning to the future, particularly regarding the price of oil. Ominous words. But first, earnings season is here, getting started, and already a few interesting stories coming out of the sector.

Muckerman: Oh, we're in the weeds, Sean.

O'Reilly: SunPower. Wow. This is A Tale of Two Cities. This is good stuff.

Muckerman: Sold off just a bit.

O'Reilly: SunPower shares fell by the biggest percentage drop in about a year, tumbling 21%. That was a good drop, thank you. You could do the sound effects for a little kids' cartoon.

Muckerman: I'm trying. Got to get that side hustle going, man.

O'Reilly: [laughs] The reason is the future. Management cut forecasts for the full year, saying they expect 2017 sales to fall in the range of $2.1 [billion] to $2.3 billion, instead of their earlier estimate of $2.6 billion. That's like 15%. This is not a minor drop.

Muckerman: Yeah, but it wasn't necessarily like this revenue disappeared. 

O'Reilly: They'll get it later?

Muckerman: Yeah. There was a project, something like Arizona or Mexico. So they pushed it back to 2018. So it's still there. It's just not this year.

O'Reilly: That's a good disclaimer. The way I'm viewing this is, management said they expect panel shipments this year to total 1.3-1.4 gigawatts. I think Doc Brown whenever I --

Muckerman: Oh, you have to.

O'Reilly: Does he say "jigawatts"? We're going to YouTube this later. I think the more telling story is what happened over at First Solar.

Muckerman: Do tell. I didn't look into that.

O'Reilly: This is my insight here. Ironically enough, the other major U.S. solar module manufacturer -- say that five times fast --

Muckerman: I can't.

O'Reilly: -- First Solar couldn't have had a better earnings release, or a reaction to share price. Shares rose 10% on July 28 after the company reported $52 million in net income, or $0.64 per share. Analysts were expecting $0.04 per share.

Muckerman: Hot damn.

O'Reilly: Not bad. The quarter proved, in my opinion, that the company is in more than capable hands. First Solar was founded in the '90s, I believe, it was literally by a scientist who wanted to make solar panels. They got taken private by private equity. But bottom line, last year, they experienced their first loss in their entire corporate history. So they're a solar panel manufacturer, and last year was the first loss.

Muckerman: That's impressive.

O'Reilly: And it was self-inflicted, because they basically said, these panels are getting really efficient; we actually need to skip our Series 5 and jump from 4 to 6. They're retooling their entire factory outside of Toledo, Ohio. I am continually amazed by how effective the management is at running this thing.

Muckerman: Yeah. Most often, these upstarts are trying to scratch and claw their way out of the red.

O'Reilly: So you have that story over at First Solar, and then you see SunPower, which, admittedly, as you said, the revenue isn't disappearing; it'll show up later on. But to me, that's just, the market is like, First Solar is executing and SunPower is not.

Muckerman: Yeah, I think you could argue that point, for sure. And First Solar has, not a cloud, but the uncertainty of what they're going to do with their 8point3 Energy stake.

O'Reilly: Both of them own it.

Muckerman: First Solar is out. They sold out. And now SunPower says that they're willing to either sell their entire majority stake or sell the whole kit and kaboodle.

O'Reilly: I think everybody was uncertain what would happen with that stock, because it was like $12-$13 a few months ago. It's up in the mid-$14s now. And everybody is like, they have these 21 years worth of contracts on there with utilities, that they sell the solar power to. It'll probably turn out OK.

Muckerman: Yeah. And with that company, I think Sean introduced our listeners to them a couple months ago, the yieldco that these companies were selling --

O'Reilly: I think they have two employees. You know what I mean?

Muckerman: [laughs] They just have the buyer, the guy who flips the switch. So this was the yieldco that they were selling projects to to get cash. First Solar and SunPower were taking the cash, and then 8point3 was then running these businesses and generating revenue. 

O'Reilly: And the reason you do that is, First Solar and SunPower are in the utility-scale business. These projects are $400 million, so picture how many solar panels you can get for $400 million.

Muckerman: I can't.

O'Reilly: Yeah. So the returns on invested capital are decent. They're 7%-10%. But it's not gangbusters. Coca-Cola's return on equity is 30%. So it's good, but it's not great. So you can make that money, if you're First Solar or SunPower, and just keep that on your balance sheet for 20 years. But who wants to do that? They would rather build the projects, get their assembly profit, drop it down, and get the $400 million back.

Muckerman: And then build another one.

O'Reilly: Right. The only hitch in that is, of course, raising capital.

Muckerman: Not always the easiest thing to do.

O'Reilly: Sometimes a problem, sometimes easy.

Muckerman: You run into some problems there, potentially, down the line. You look at SunPower freeing itself from that, potentially getting some cash out of that deal from its stake being bought out. And it has a decent balance sheet already. And it has Total, if something does hit the fan, as their big brother.

O'Reilly: Sixty-seven-percent owner. And, to SunPower's credit, they actually have crazy efficient solar cells.

Muckerman: Yeah, some of the best in the business.

O'Reilly: But First Solar's balance sheet is prettier. [laughs] Anyway, moving on from solar --

Muckerman: So a 21% drop in a day. It might be worth a look. Don't buy, but it might be --

O'Reilly: Do you think? Because of the solar panel efficiency?

Muckerman: Yeah, and the backing of Total. It's integrated. It makes its own and it installs its own. I think anytime you see a 21% drop in a company that's ...

O'Reilly: Working on things.

Muckerman: Yeah. It's worth a second look, especially in an industry that could be the future of energy.

O'Reilly: Right. Moving on to the other energy source that we all use.

Muckerman: Oh, that one?

O'Reilly: Yeah, the black stuff in the ground. Pioneer National Resources. Woof.

Muckerman: Yeah, another kablooey. Not nearly as big, though.

O'Reilly: I was working on something yesterday, and you alerted me to this, you Slacked me and sent it to me. And I thought it was a typo, the 13% drop, which was the situation when you sent it over. Pioneer walks on water, right?

Muckerman: Yeah, their oil floats on water.

O'Reilly: [laughs] Nice. I see what you did there. They beat on earnings. Why was the reaction so violent about the future? Were the projections that bad?

Muckerman: They did trim some things.

O'Reilly: My favorite headline, by the way, and then I'll let you take us to school, was, from Barron's, "Pioneer Natural Resources: What the Heck Just Happened?" [laughs] 

Muckerman: Yeah, because you're not used to seeing this from this company.

O'Reilly: That headline right there ...

Muckerman: When you compare it to other producers in the U.S., it just hasn't seen the downfall in 2017 that a lot of the other stock prices have.

O'Reilly: Do you have the chart pulled up there?

Muckerman: I don't, no.

O'Reilly: Since the oil downturn started in 2015, I think they were in the low $200s per share. Don't quote me, ladies and gentlemen, I'm sorry. But it didn't fall nearly as much --

Muckerman: No. It rallied well after the initial price cut by OPEC.

O'Reilly: And they're known as the efficient shale producer in the Permian.

Muckerman: Which is the biggest and baddest right now.

O'Reilly: Or so everybody thought -- bulletproof in some respects. What happened?

Muckerman: You did mention that they beat estimates on revenue and earnings. But basically, what you're seeing here is a company that produced a higher gas-to-oil ratio than people were expecting.

O'Reilly: Just so the listeners know, we won't get into calculating BTUs and all this stuff, but bottom line, there's more energy in oil than in gas, even though we do the oil-to-gas calculation. That lower energy content in a certain unit means it fetches a lower price per that unit. And it's barrel of oil equivalent, but bottom line, that's bad. It means they're going to get less money per amount of energy that they're producing.

Muckerman: Yeah. They were guiding 60% oil. Now they're guiding 58%. That's not a huge drop. But when I think about it, they're talking about natural gas liquids in a lot of these instances.

O'Reilly: As a future push?

Muckerman: No, that's part of this gas ratio, gas-to-oil ratio. If you look at all the petrochemical projects being built in the Gulf of Mexico, there's going to be a pretty good demand for natural gas liquids. Granted, I haven't taken a deep enough dive into the amount of natural gas liquids versus gas-gas that they're producing, but there's going to be a pretty decent-sized market for natural gas liquids like propane, butane, ethane in the very near future. There already is, but it's going to continue to grow. Then, you look at their oil guidance, they were saying they were going to grow oil production by 24%-28% this year.

O'Reilly: Which is enormous. Call a spade a spade.

Muckerman: Yeah, but they dropped it down to 17%-18%. So their top-line growth rate dropped by 10%. It didn't drop 10%; it dropped by 10 percentage points.

O'Reilly: Yeah. Do you think the market was more upset about the oil production?

Muckerman: I think so. It hints that they didn't understand their wells very well, or they thought they did and they got surprised. So, if that continues, you buy this company because there's supposedly 60% oil.

O'Reilly: And not only that, but they were supposedly the best in the business.

Muckerman: Yeah, and they had some project delays and deferrals. So there's issues on the operating side. And so, when you say that you're the best of the best and people believe it, then something does trip you up, then yeah, there's a reaction there.

O'Reilly: Taylor. This Pioneer earnings reaction lends itself to the other big story of the day, which is, oil companies are planning on $50 forever.

Muckerman: Yeah, that's what Shell said. Lower forever.

O'Reilly: Lower forever. I almost wonder if part of the Pioneer earnings reaction was psychologically tied to that, which is, we thought these guys were above the fray.

Muckerman: They're still producing oil cheaply. But now everyone else is starting to catch on.

O'Reilly: Tech advantages only last for so long.

Muckerman: Yeah. People figured it out. They lease better assets; they buy better assets.

O'Reilly: I have a question for you. How much of this acceptance -- and BP is in on it, too, right? They're all planning on $50?

Muckerman: Yeah. You look at these companies -- Shell said lower forever, BP said lower for longer. They all think lower for an extended period of time.

O'Reilly: Whenever I see something like that, I'm like, did you see the current drop coming in early 2015? Did you see $50, all of 2017, or at least the first half? So how much of this and the statements being put out by these companies in the acceptance, how much of it is accounting-generated? By which I mean, SEC rules require oil companies to judge all of their reserves, everything, based upon the average oil price from the previous 12 months. We're two and a half years into this thing. How much of that is the accountant saying, "Listen, it could go up, but from an accounting planning perspective, we need to assume this." How much of it is that, and how much of it is, they actually think that?

Muckerman: I think that.

O'Reilly: You think 50 forever? [laughs] 

Muckerman: Not forever, but, for a while.

O'Reilly: Do you own a Tesla? [laughs] 

Muckerman: No, I don't own a car.

O'Reilly: Me, neither.

Muckerman: So I'm even worse.

O'Reilly: We're urbanites, full disclosure.

Muckerman: So I'm not even requiring them to produce energy for me to be transported. So both of these companies, they're two of the five biggest oil companies in the world, and when you think about that, talking about lower for longer, lower forever, I think they're game-planning for it on the production side because there's some truth in that, most likely. And if oil prices do rise and they can produce oil profitably at $50 a barrel, then they're sitting in high clover. I think it's a win-win situation. You always should be trying to produce at the lowest possible cost.

O'Reilly: So, this is the game theory scenario of, no matter what happens, and, this is what a commodity producer should do, which is always produce at the cheapest cost?

Muckerman: Sure, why wouldn't you want to be able to produce oil at $50 a barrel, if you think prices are going to be $100? It might be a little harder to get there, but once you're there, you're there. They had such a good run for a decade or so, with oil prices at $75-$80, to $150 at some points, where they didn't necessarily need to get those costs down. Now that they've been forced to, they're like, "Wow, we can do this, and we're going to continue to do this as long as we possibly can." BP's CEO came out and said that $50 a barrel is a pretty good fairway for them going forward. That means they're OK with it.

O'Reilly: That's amazing.

Muckerman: They're well prepared. And like you were talking about, the assets on their books are based on oil they can recover at the average price of the previous --

O'Reilly: And the rules that it has to be economic.

Muckerman: Yeah, economic recovery of this oil. So if they can get this, the lower they get that price that they can economically recover oil for, the more they can keep on their books. You saw a bunch of writedowns when the oil price fell, because they couldn't produce it that cheaply. And if they can, the balance sheet grows.

O'Reilly: Sweet. Thank you for your thoughts, Mr. Muckerman.

Muckerman: Cool, man. 

O'Reilly: That is it for us, folks. Be sure to tune in tomorrow for the Technology show with Dylan Lewis. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening, and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.