There has been a noticeable shift in the U.S. oil industry over the past couple of years. Oil producers that once trumpeted how fast they could grow are now highlighting their value proposition, drilling down into why they believe they can enrich investors in the future.
Pioneer Natural Resources (NYSE:PXD) is the latest driller to make this shift. On the fourth-quarter conference call, CEO Tim Dove drew attention to this point by laying out the company's five pillars for creating shareholder value.
1. Our primary focus is on drilling for returns
Dove started off by pointing out that Pioneer aims to invest capital so that it can earn high returns. He pointed out that in 2018, "we delivered a ROCE [return on capital employed] for the year of about 9%," which was "significantly up from the 4% level that we had in 2017." He added: "That's clearly a sign of high return wells, high return margins that eventually hit the bottom line. Actually, we would have been in double digits had we not liquidated hedges in the fourth quarter, which will hit directly to the P&L [profit and loss]."
The company has undertaken several actions in the past year to boost returns. It closed its frack sand mine and sold its oil services business and replaced those in-house options with lower-cost outsourced providers. The company has also sold off most of its assets outside the Permian Basin, which is where it earns the highest drilling returns. These actions will help Pioneer to enhance its returns on capital spending.
2. We're becoming much more disciplined allocators of shareholder capital
Pioneer, like many peers, used to reinvest every penny of cash flow, and then some, into drilling more wells. From here, however, the company aims to be much more disciplined. Dove pointed to "a significant capex decrease [of] about 11% compared to 2018" as evidence of the company's growing capital discipline. Though thanks to the higher returns it's earning on capital, it can still grow at a healthy rate, with Dove noting that Pioneer can "deliver a strong 15% increase in production" this year. This capital discipline forces Pioneer to focus on investing in its highest return opportunities.
3. We're ramping up the return of capital to shareholders
As part of Pioneer's capital discipline, it set its 2019 capital budget range to $2.8 billion-$3.1 billion, which is below the $3.2 billion of cash flow it anticipates producing this year. That will allow the company to generate some free cash, which it intends on returning to shareholders. Dove noted on the call that "our return of capital to shareholders continues to expand as part of our main goals, as we repurchased about $328 million of our $2 billion authorization that we put in place in December ... over the last two months," at "attractive prices." He added that "we doubled our dividend that amounts now to about a 700% increase over the last two years, an eightfold increase."
Dove further stated that in returning "capital to shareholders, we're showing to the market that's important to us." In paying a more competitive dividend and repurchasing shares when they're selling for a good value -- as was the case early this year, given their double-digit sell-off in December -- Pioneer has set itself up to produce higher total returns for shareholders over the long term.
4. We aim to maintain our strong balance sheet
Dove also noted: "We already have one of the best balance sheets in the industry, and we plan to keep it that way with low leverage, because you never know what's going to happen with commodity prices; we certainly want to be responsive and to have the right balance sheet to be able to deal with any outcome. And I think that's a position we're in today."
The company ended last year with $1.4 billion in cash and only $900 million in net debt, which gave it the lowest leverage ratio in its peer group. That fortress-like balance sheet will help Pioneer withstand whatever the oil market throws its way, while giving it the flexibility to take advantage of opportunities that might develop should market conditions deteriorate.
5. We have a highly repeatable program
Dove concluded his overview of Pioneer's five pillars by stating that the company can manufacture growth because "we have quite a large inventory of wells to drill over the next many years." As a result, the company won't "really need to do large acquisitions like some of our peers to grow," which Dove said "then preserves our low cost basis in the acreage."
"And so it's essentially organic growth from the drill bit," he added, "and I think that's the best way to proceed from the standpoint of returns and all of these goals."
The final pillar of Pioneer's foundation for creating shareholder value is its vast inventory of high-return drilling locations in the heart of the Midland Basin. The company controls 680,000 net acres that hold an estimated 10 billion barrels of oil equivalent resources, which it can develop. Given the predictable nature of these wells, Pioneer can steadily grow production and cash flow for years to come.
A strong foundation for success
Pioneer Natural Resources believes it built a company that can create tremendous value for shareholders in the coming years. By focusing on investing for returns while keeping a lid on spending as it develops its vast and predictable resource base, the company can produce free cash flow and return it to investors while maintaining a top-tier balance sheet. Those pillars should enable Pioneer to prosper in both up and down markets so that it can enrich investors over the long haul.