One of the most important things that investors need to understand about the energy sector is that oil and natural gas prices tend to be highly volatile. They can, and do, go up and down in dramatic fashion. As an energy producer, Pioneer Natural Resources' (PXD) financial results and stock performance end up being heavily influenced by commodity price volatility. A look at the last three years shows very clearly how this one issue could lead to huge price gains or huge declines.
Breaking down some stock returns
Between June 12, 2023 and Sept. 7, 2023 Pioneer Natural Resources stock jumped nearly 20%. The S&P 500 Index, meanwhile, only rose around 3% over that same time span. It's not unusual for a company to outperform for short periods of time. But taking a look at another time period here adds to the intrigue.
Between Sept. 11, 2022 and June 12, 2023 Pioneer Natural Resources stock fell almost 21%. Over that same time period the S&P 500 Index was up a touch more than 15%. Again, it's not odd for a company to underperform over some period of time. The problem, however, is the comparison point. Yes, Pioneer Natural Resources is a stock and it's even in the S&P 500 Index. But it is also an energy company that produces oil and natural gas.
The two time periods above correspond to periods of time in which West Texas Intermediate (WTI) crude prices, a key U.S. energy benchmark, were rising and falling, respectively. As the chart below shows, if you compare WTI price movements with the price movements of Pioneer Natural Resources they follow very similar paths.
Pioneer sells a commodity product
As an energy producer, Pioneer Natural Resources' top- and bottom-line results are directly impacted by the price of oil and natural gas. There are other factors that can help and hurt financial performance, like production levels and hedging activity. But if commodity prices are falling, there's only so much the company can do to offset the hit to revenues and earnings. Conversely, when oil and natural gas prices are heading higher, the benefit will, usually, quickly lead to stronger financial results.
PXD Dividend Per Share (Quarterly) data by YCharts
Investors are well aware of this fact and act accordingly. Additionally, Pioneer Natural Resources has tied its dividend to financial performance. So dividends will rise and fall along with energy prices, too. That likely exacerbates investor sentiment to the upside and downside, as well, as some income-focused investors may trade in anticipation of dividend changes.
Simply put, big swings in oil and natural gas prices are the one thing that investors can expect to lead to big swings in Pioneer's stock price. The tie between the two is fairly material, too, with a correlation between WTI prices and Pioneer's stock price that can get as high as 90% at times.
In other words, if you are looking at Pioneer Natural Resources you always have to remember that oil and natural gas prices will have a massive impact on the stock's performance. A large dividend yield, strong production, and even good hedging results won't change that fact.
Enjoy the upswing, but be ready for the decline
Oil prices have been heading higher of late, which has resulted in Pioneer Natural Resources dramatically outperforming the broader market. There's no way to know how long this oil rally will last. What is clear from the history of the energy sector is that, eventually, oil and natural gas prices will come back down to earth. And when that happens investors in Pioneer Natural Resources should be ready for the stock to fall, and perhaps underperform the market. It's the way the industry works, sometimes with a correlation of as much as 90%!
