Pioneer Natural Resources (NYSE:PXD) continued its steady march higher in the first quarter by again delivering production toward the high end of its forecast range. That enabled the company to blow past earnings expectations once again, keeping it on pace to hit its lofty long-term forecast.

Drilling down into the results

Metric

Q1 2018

Guidance or Expectations

Difference

Production

312,000 BOE/D

304,000-314,000 BOE/D

1%

Earnings per share

$1.66

$1.50

10.7%

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

An oil pumping unit at sunset.

Image source: Getty Images.

Pioneer Natural Resources added 7,000 BOE/D of incremental production during the first quarter, boosting output 2% from the final quarter of 2017 and 25% year over year. Fueling that growth was the company's assets in the Permian Basin, where production rose by 9,000 BOE/D, or 3% sequentially, to an average of 260,000 BOE/D, which hit the high end of its guidance range. That strong result came even though freezing temperatures in early January caused the company to miss out on 6,000 BOE/D during the quarter. Also impacting output was a fire at a compressor station in the West Panhandle field, resulting in 2,000 BOE/D going off line.

That stronger-than-expected production along with oil prices in the mid-$60s and an ability to keep a lid on costs enabled Pioneer Natural Resources to generate $284 million, or $1.66 per share, in adjusted net income. That's a big improvement from the year-ago period, when it posted $42 million, or $0.25 per share, in adjusted net income. Cash flow from operating activities, meanwhile, was even stronger at $554 million, up more than 50% year over year.

An oil field at sunset.

Image source: Getty Images.

A look at what's ahead

Pioneer Natural Resources is in the second year of an ambitious 10-year plan to increase its production up to an average of 1 million BOE/D. However, the aim of that plan isn't just to produce more oil and gas but to grow cash flow, which it sees rising at a 20% compound annual rate over that time frame assuming oil averages $55 a barrel. This focus on increasing production that expands cash flow is why the company is in the process of transitioning into a pure-play on the high-margin Permian Basin by selling off the rest of its oil and gas properties.

Pioneer took the first step in that direction during the first quarter by selling some land in the Eagle Ford Shale for $103 million. The company has already put the rest of its Eagle Ford Shale assets on the market while also planning to sell its position in South Texas, the West Panhandle, and the Raton gas field.

The cash proceeds from these assets sales will enable Pioneer to bolster what is already the strongest balance sheet in the sector. The company ended the first quarter with $1.8 billion in cash and just $2.7 billion in debt, though it plans to use $450 million of that cash to repay a bond that matures in May. That puts its net debt-to-book capitalization ratio at a mere 7%. For comparison sake, most oil companies are comfortable with this level in the 25% to 40% range. Top tier shale driller EOG Resources, for example, boasted a net debt-to-total capitalization ratio of 25% last quarter. However, EOG Resources does plan to pay off $3 billion in bonds over the next four years, which would cut net debt by more than 50%. Pioneer, meanwhile, appears well on its way to having more cash than debt on its balance sheet, which would give it unparalleled financial flexibility to fund growth in the coming years.

High-octane growth ahead

Like many peers, Pioneer Natural Resources got off to an excellent start in 2018 despite some early headwinds. As a result, the company remains on track to achieve its aim to be a million-barrel-a-day producer within 10 years, even as it jettisons several lower-margin properties. It's a strategy that could create significant value for investors in the coming years, even if oil loses a little altitude.

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.