Pioneer Natural Resources (PXD 0.01%) continued its high-octane growth in the first quarter: Production jumped 25%, fueling an increase of more than 50% in cash flow. However, CEO Tim Dove made clear on the accompanying conference call that the company has plenty of growth left in the tank. He also detailed three things he wanted investors to know, showing that the company's best days still lie ahead.
1. Our balance sheet is among the best in the business
One of the first points Dove made on the call was that Pioneer "continue[s] to maintain the strongest balance sheet in the energy sector, with about $1.8 billion of cash on hand. And as a result, we continue to have very low debt statistics." The company used some of that money to pay off $450 million in debt in May and currently has just $900 million in net debt, which is minuscule for a $35 billion oil company; CFO Rich Dealy concluded that Pioneer is "still in excellent financial condition." That strong position gives the company the financial flexibility to continue growing even if oil prices tank.
2. We're making progress on our transition into a pure play on the Permian Basin
The company's financial position could grow stronger later this year because it's currently in the process of selling off all its non-Permian assets to become a pure play on that high-return Basin. Pioneer made some progress on that strategy during the quarter by selling a package of land in the Eagle Ford Shale for $103 million, which Dove called "a very positive result for the company."
Dove then noted that Pioneer made good progress on selling its other noncore assets, though he did caution that it would likely take the whole year to complete the process. The reason the company is undergoing this transformation, he said, is that it will "enhance our reported returns because ... our reported cash margins will increase ... our operating costs will be reduced per BOE, and our corporate returns will also be significantly improved. So this is important for us to accomplish."
3. We might hit the accelerator later this year
Pioneer Natural Resources, like most of its rivals, based its 2018 budget on the cash flow it could generate at an oil price in the $50s -- although, while many set their budgets for $50 oil, Pioneer's breakeven was $58 a barrel. However, with crude now around $70, the company is generating more cash than expected, and Dove said, "it's likely that our capital budget for this year of $2.9 billion will be increased." The company hasn't yet decided on how much it will increase the budget, as it needs more time to gain a firmer grasp on the market. Dove thought that "probably around midyear we'll have a much better handle on exactly where that number will land. In any case, our intent is to spend within our forecasted cash flow, which is now projected at $3.2 billion." This potential to boost the budget sets Pioneer Natural Resources apart from most rivals, which have made it clear that they have no intention of increasing spending this year even though oil is much higher.
Devon Energy (DVN -1.38%) was one of those. While that company's CEO did note on Devon's quarterly conference call that capital expenditures would trend toward the high end of its guidance range, that's because Devon was "completing our plan 2018 program quicker than anticipated." As a result, the company would "most likely accelerate some 2019 program into 2018," even as it stays within its initial budget guidelines. Doing so will enable Devon to grow faster while still generating excess cash at current oil prices, which it's returning to shareholders through a $1 billion stock buyback and 33% dividend increase.
The best is yet to come
That's not to say Pioneer isn't rewarding its investors -- it did authorize a $100 million buyback, and boosted its dividend significantly this year. Additional cash returns could be on the way due to the strength of the company's position in the Permian Basin. That was a key message of the CEO, who stated that the company controls an asset that's "low-risk" and one that it's going to be drilling for "many decades." He went on to say that the company's exceptional Permian position provides "an opportunity to drill not only high-return wells, but also increase our ability to return capital to shareholders."
That value-creating growth is what makes Pioneer's stock so compelling for the long term.