After stumbling in the middle of 2017, Pioneer Natural Resources (PXD +0.00%) bounced back big-time at the end of the year. The Permian Basin driller obliterated expectations in the fourth quarter by delivering guidance-trouncing production thanks to the strength of its drilling program. Overall, output was up 16% for the year, which kept it on track to achieve its ambitious long-term goal to increase production at a compound annual rate of more than 15% through 2026.
That said, one of the key themes of CEO Tim Dove's comments on the quarterly conference call was that the company wasn't just growing to grow. The CEO made it clear that the company is focusing on increasing shareholder value as well. Here are four things he wanted investors to know about what to expect from the company in the coming years.
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The company is becoming a pure play on the Permian
Dove started off his glimpse into the future by detailing the company's "plan to divest of all the assets that are essentially non-Permian." He said this "includes our Eagle Ford assets, other South Texas assets, our Raton assets in southeastern Colorado, and our West Panhandle assets in the panhandle of Texas." These sales would "result in making Pioneer a pure Permian Basin player," according to Dove.
What's noteworthy here is that the company isn't unloading these assets because it needs the cash. Dove noted that the effect of this decision would be multifaceted:
Taking these steps will be a positive for the company on many fronts. Certainly, once the divestitures are completed, it will increase our reported rate of growth because we'll just be focusing on Permian growth rates. It will increase our reported revenue per BOE [barrel of oil equivalent], reduce our operating expense per BOE, therefore improving our reported margins and, further to that, our corporate returns. And so it does a lot for the company.
In other words, Pioneer will become a much more profitable company and should generate higher returns for investors by focusing solely on the Permian.
In pursuing this path, Pioneer joins a growing list of oil companies that have sold off noncore assets to focus on their best locations. Rivals Devon Energy (DVN +1.73%) and Hess (HES +0.00%), for example, sold billions of dollars in assets in recent years to streamline their operations. Devon sold more than $3 billion of assets in 2016, including $435 million of properties in the Midland Basin side of the Permian to Pioneer, and had hoped to jettison another $1 billion last year. Those sales sharpened Devon's focus on its two core assets: the Delaware Basin side of the Permian and the STACK shale play. Meanwhile, Hess high-graded its portfolio by selling $3.4 billion in assets in recent years. That allowed Hess to focus on its growth engines in the Bakken shale and offshore Guyana, as well as its cash engines in the Gulf of Mexico and Malaysia.
Its industry-leading financial metrics will only get better
The potential proceeds from Pioneer's upcoming asset sales will further bolster what's already one of the best balance sheets in the industry. The company ended last year with $2.2 billion in cash, which pushed its net debt ratio down to just 0.3 times EBITDA. For comparison's sake, Devon wanted to sell another $1 billion of assets last year to get net debt closer to its target of 1 to 1.5 times EBITDA. Those numbers led Dove to boast that "when you couple our current balance sheet with the potential for the proceeds from the divestitures and then you look at our potential going forward, it's very clear the company's financial flexibility is a clear strength."
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It's starting to send more cash to investors
Pioneer said that it plans to use some of its cash pile to pay off an upcoming $450 million debt maturity. With such a strong balance sheet, the company also wanted to reward investors by sending more cash their way. That's why Dove said the company "has increased its semi-annual per-share dividend from $0.04 to $0.16." Further, Dove noted that the company "plans to initiate a common stock repurchase program." Though, it currently expects to buy back only about $100 million this year, which would offset the dilution associated with the company's stock-compensation plans. In announcing a buyback, Pioneer joins a growing number of oil producers repurchasing shares this year, including Hess, which plans to buy back $500 million.
Even if oil dips, it can still become a cash flow machine
Pioneer's cash returns to investors could ramp up in the coming years given the power of its long-term growth plan. Dove noted that, based on oil averaging $55 a barrel, the company's cash flow would grow at a 20% compound annual rate through 2026. That plan positions the company to increase its operating cash flow from less than $3 billion this year "to over $11 billion of cash flow" in less than a decade, according to the CEO. And if oil prices stay above the $60-a-barrel level, the company could generate more cash that it could return to investors.
Getting brighter every quarter
Pioneer Natural Resources has always believed it was sitting on an oil-filled gold mine in the Permian Basin. With each passing quarter, the company's results offer further support to that view -- and leave fewer doubts that this oil stock can fuel top-tier returns for investors, as long as oil prices hold up.
