Pioneer Natural Resources (NYSE:PXD) has erased any doubt that the headwinds plaguing it earlier in the year would continue holding it back. The Permian Basin-focused driller just reported expectation-trouncing fourth-quarter results, blasting past analysts' estimates by delivering a torrent of production in the quarter. 

That kept the company firmly on pace to meet its ambitious long-term growth objectives. However, Pioneer did announce several strategic decisions that mark a slight shift from its previous strategy.

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

Image source: Getty Images.

Drilling down into the results

Metric

Q4 2017

Guidance/Expectation

Difference

Production

305,000 BOE/D

292,000-302,000 BOE/D

2.7%

Earnings per share

$1.22

$0.79

54.4%

Data source: Pioneer Natural Resources. BOE/D = barrels of oil equivalent per day.

After facing a barrage of headwinds earlier in 2017, Pioneer met little resistance in the fourth quarter, which enabled it to complete wells quickly. Overall, production jumped 11% from just the third quarter and topped the high end of its guidance range. That pushed full-year output up 16%, which was better than the 15% increase expected, though still lighter than its initial forecast of 15% to 18% growth due to those earlier headwinds. That surge in output, when combined with a 12% drop in production costs, enabled the company to deliver earnings that were once again well above expectations.

The company didn't run up against any of the production issues that plagued fellow Permian Basin peer Laredo Petroleum (NYSE:LPI) during the quarter. Whereas Laredo's production came in below the midpoint of its guidance range due to a drilling slowdown and some operational problems, Pioneer's output exceeded expectations thanks to in part to the significant outperformance from wells completed with its latest method. 

That said, Pioneer did note that it had some issues with cost inflation, going about $100 million over budget. That matched Laredo, which also went $100 million over its initial budget and was a bit more than Parsley Energy (NYSE:PE), which spent about $50 million above the high end of its budget range. That said, Pioneer pointed out that it expected cost inflation to be just 5% this year, but would offset that with efficiency gains. That's well below the 10% to 15% impact of cost inflation that most of its rivals expect in 2018, which Pioneer can partially mitigate with its vertical integration efforts since it owns, for example, a sand mine to support its fracking operations. Contrast that with Parsley Energy, which warned that higher-than-expected inflation would cause it to spend at the high end of its budget guidance this year.

An oil pump next to a pond.

Image source: Getty Images.

A lean, mean Permian drilling machine

In addition to reporting stellar results, Pioneer unveiled its outlook for 2018. The company said that it expects to spend $2.9 billion on capital projects this year, up about $150 million from last year's budget. That money would enable the company to run 20 drilling rigs in the Permian Basin, which should boost production from that region 19% to 24% versus last year to 266,000-278,000 BOE/D. Furthermore, the company noted that it would earn a 65% internal rate of return on that capital assuming oil averaged $55 a barrel, which is much lower than the current mid-$60 level.

The company only plans on investing about $20 million in capital into its other resource positions, including the Eagle Ford Shale. That's because it plans on selling those assets this year to become a pure play in the Permian. Those sales could cause full-year production to fall versus 2017 depending on their timing. However, the company expects to more than offset that in the coming years, with it planning to boost its Permian output up to 1 million BOE/D by 2026.

Pioneer noted that it could fully fund its 2018 plan if oil averages $58 per barrel. Furthermore, the company said that it intends on using a portion of its $2.2 billion cash pile to pay off an upcoming $450 million debt maturity. The company could quickly replenish that war chest as it sells off non-core assets and generates excess cash if crude remains in the $60s.

Because Pioneer has a cash-rich balance sheet, it's planning to return more money to shareholders this year. The company announced a fourfold increase in its dividend and said it would repurchase enough shares this year to offset the dilution of its employee stock program. Those cash returns to shareholders could accelerate in the coming years since Pioneer expects cash flow to increase from about $3 billion this year to $11 billion by 2026 if oil averages $55 a barrel. 

On track to deliver elite performance

Pioneer Natural Resources' fourth-quarter results turned what had been a disappointing year into another exceptional one for the company. It remains firmly on track to meet its ambitious goal to increase cash flow at a 20% annual clip over the next few years, which is tech stock-like growth and could fuel market-smashing returns for long-term investors, especially as it ramps up cash returns in the future.

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