Pioneer Natural Resources (NYSE:PXD) has been one of the best exploration and production companies in the business, but this quarter's earnings report has a lot of investors second-guessing whether that still holds true.
In this Industry Focus segment, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain what was so wrong with the report, how warranted the 13% sell-off was, and what these trends say about the future of the company long term.
A full transcript follows the video.
This video was recorded on Aug. 3, 2017.
Sean O'Reilly: Moving on to the other energy source that we all use.
Taylor Muckerman: Oh, that one?
O'Reilly: Yeah, the black stuff in the ground. Pioneer Natural 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.