Pioneer Natural Resources (NYSE:PXD) has been turning all its attention to the Permian Basin in recent years, which continues to pay dividends. The company was able to leverage its leading position in the play to produce a gusher of oil during the third quarter, which drove its earnings well past analysts' expectations. That trend appears poised to continue thanks to the company's proactive moves to lock up pipeline capacity, which is proving to be a valuable commodity given the region's current issues.

Drilling down into the results

Metric

Q2 2018

Guidance or Expectations

Permian production

288,000 BOE/D

278,000-288,000 BOE/D

Adjusted earnings per share

$2.07

$1.68

Data source: Pioneer Natural Resources.

Pioneer Natural Resources' production in the Permian hit the top end of its guidance range, growing 5% compared to the second quarter. Meanwhile, oil production expanded at an even faster pace, increasing 7% sequentially to 186,000 barrels per day (BPD), which exceeded the top end of its 178,000-184,000 forecast range, driven by stronger-than-expected results from the 69 wells the company brought online during the quarter.

That high-end result enabled Pioneer Natural Resources to deliver expectation-crushing earnings for the quarter. Another factor fueling the better-than-expected profitability was Pioneer Natural Resources' decision to lock up firm transportation contracts on pipelines to the Gulf Coast for the bulk of its oil production, where it captured higher prices for those barrels than it would get in the region. Overall, the company delivered 165,000 BPD to the Gulf Coast, while also exporting 130,000 BPD to global markets, where it can fetch even higher oil prices. The company's decision to secure firm transportation contracts for the bulk of its Permian oil added $200 million of incremental cash flow to its tally during the third quarter.

An oil pump with the sun setting in the background.

Image source: Getty Images.

A look at what's ahead

Pioneer Natural Resources didn't make any changes to its 2018 plan, with the company sticking to its $3.4 billion capital budget. That will provide it with enough money to complete 250 to 275 Permian wells this year, which should fuel 19% to 24% production growth compared to last year, though growth is trending toward the top end of that forecast. Meanwhile, the company expects to fully fund that plan with cash flow, thanks to an improvement in oil prices and the company's decision to lock up even more firm transportation to the Gulf, which should yield $125 million of incremental cash flow during the fourth quarter.

The company also remains on pace to sell all of its non-Permian assets by the end of the year to become a pure-play on that region. Pioneer recently agreed to sell its South Texas Sinor Nest assets for $132 million, and it has already closed the sale of its West Panhandle Field, Raton Basin, and some of its Eagle Ford shale assets for a combined $383 million. All that remains is the balance of its Eagle Ford Shale position, which is progressing as expected.

Aside from focusing on growing its output in the Permian, which the company believes will reach 1 million BOE/D by 2026, Pioneer aims to reduce its cost structure to boost profitability further. It took a notable step in that direction during the quarter by signing a long-term sand supply deal with U.S. Silica (NYSE:SLCA). The 15-year contract will supply Pioneer with sand from U.S. Silica's mine in Lamesa, Texas, strategically located near Pioneer's acreage in the Permian. Pioneer sees the deal cutting its sand costs in half going forward, which will help lower its well costs starting next year.

Set up for high-octane growth in the years ahead

Pioneer Natural Resources is in the midst of a strong year, which is likely a small glimpse of what's ahead. That's because the company is only in year two of a 10-year plan that could ultimately see it pump 1 million BOE/D out of the Permian. That growth strategy has the potential to create significant value for investors since Pioneer believes those barrels will become even more profitable as it continues shipping them to premium-priced markets while also working to reduce costs.

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.