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Should Pioneer Natural Resources Investors Brace Themselves for Another Bombshell This Quarter?

By Matthew DiLallo - Oct 31, 2017 at 1:31PM

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The shale driller's stock cratered after it watered down its full-year guidance last quarter.

Pioneer Natural Resources (PXD -1.96%) shocked investors last quarter by announcing that it would tap the brakes on its 2017 growth forecast due to some drilling issues. That decision, as well as the revelation that wells in the Permian Basin were producing more gas than anticipated, fueled a steep sell-off in the shale driller's stock. While it has recovered some of that loss, it's still down a disappointing 19% this year despite the fact that oil has only fallen about 3%.

One reason the stock remains down is that investors seem worried that the company might disappoint them again when it reports third-quarter results later this week. That's not farfetched since it has already warned that output was lighter than expected due to several unanticipated setbacks. However, an even greater concern is what will happen with the company's long-term growth forecast given some recent changes in the industry. 

A beam of light shining through an oil pump at sunset.

Image source: Getty Images.

A sneak peek at Q3

Earlier this month, Pioneer Natural Resources announced that production for the third quarter averaged 276,000 barrels of oil equivalent per day (BOE/D). While that was up 6% from last quarter and was within the company's 274,000 to 279,000 BOE/D guidance range, it wasn't as high as it could have been because the company battled some unexpected headwinds during the quarter.

First, Hurricane Harvey drenched south Texas, which caused producers in the Eagle Ford Shale to shut in production and stop completing new wells. As a result of that storm, Pioneer lost 900 BOE/D during the quarter from that region. Further, Pioneer stated that it had to limit 1,300 BOE/D of output in the Permian Basin due to outages at third-party facilities that fractionate its natural gas liquids (NGLs) by separating them into the various streams such as ethane and propane.

In addition to those two storm-related impacts, Pioneer noted that a third-party natural gas plant that processes its production from the West Panhandle field in Texas into natural gas and NGLs caught fire in mid-September and experienced some unexpected downtime. Because of that, the company had to shut in its production from that entire field, or about 8,000 BOE/D. While the impact for the quarter was only 1,300 BOE/D, and repairs are underway, it could be months before it's back online. Because of that, Pioneer is working to reroute the volumes from this field so that it can resume production.

Overall, these issues lopped 3,500 BOE/D from Pioneer's output during the quarter. If it wasn't for these problems, production would be toward the high end of its guidance range.

An oil field worker with a laptop at sunset.

Image source: Getty Images.

No impact on future growth...yet

Despite the low-end result, Pioneer noted in its mid-October production update that it expects full-year output to be within its watered-down guidance range of 15% to 16% above last year's average. That said, this forecast anticipates that Pioneer gets its Panhandle field back online by early November at the latest, and that it doesn't run into any more drilling or storm-related issues.

However, even if the company meets its full-year guidance, there's growing concern that its ambitious plan to increase output by a more than 15% compound annual rate through 2026 -- which would push daily production up over 1 million BOE/d -- might not come to fruition. For starters, the company needs crude to average $55 a barrel to pay for that plan with cash flow, which is below the current price. Meanwhile, investors don't seem to be as excited about how fast a company can increase production as they had been, especially since many rivals are shifting their focus toward growing cash flow and shareholder returns.

For example, Anadarko Petroleum (APC) recently announced plans to return $2.5 billion in cash to shareholders over the next year via share repurchases. One reason Anadarko chose a buyback over accelerating production growth is that it could deliver a meaningful impact without flooding the market with more oil. That's because its repurchase program would boost output and earnings by 10% on a per-share basis.

Meanwhile, Encana (OVV -2.05%) recently shifted its message to shareholders. Last year, the theme of its Analyst Day was that it could boost production 60% in five years. However, this year, Encana's message was that it could grow cash flow at a 25% compound annual rate through 2022. Further, Encana said that its updated five-year plan would generate $1.5 billion in free cash over its lifespan at $50 oil, which the company could eventually return to shareholders. If more producers embrace this mindset shift, Pioneer's focus on production growth might work against it if investors see the company as part of the industry's problem and not a solution.

Don't expect a blowout or bombshell

Because Pioneer Natural Resources pre-announced third-quarter production, it doesn't look like the company's results will contain any surprises. That is unless it unexpectedly decides to back away from its long-term growth forecast due to persistently low oil prices and the shifting focus of its peers from growing output to shareholder returns. That said, a similar shift by Pioneer would be a wise move since investors would rather see the company pull the most value out of its vast resource base instead of just trying to pump out as much oil as possible.

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Stocks Mentioned

Pioneer Natural Resources Company Stock Quote
Pioneer Natural Resources Company
$210.93 (-1.96%) $-4.21
Ovintiv Inc. Stock Quote
Ovintiv Inc.
$39.14 (-2.05%) $0.82
Anadarko Petroleum Corporation Stock Quote
Anadarko Petroleum Corporation

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