Pioneer Natural Resources vs EOG: Which Is Better for Income and Growth?

Pioneer Natural Resources (PXD) and EOG Resources (EOG 2.72%) are two of the largest independent exploration and production players in the U.S. domestic oil market. And if investors want to gain some exposure to the U.S. oil boom, Pioneer and EOG are two great picks.

However, both EOG and Pioneer have their own individual plans for growth, and this makes things confusing. In particular, Pioneer's development plans are focused around the huge Spraberry/Wolfcamp play.

Meanwhile, EOG's game plan is more diversified, targeting growth from the company's plays in the Bakken, Eagle Ford, Permian, and Barnett regions.

But the question is, which company is better placed for income and growth?

Rising production
Let's start this analysis with Pioneer, as the company is targeting 100% production growth through 2018 -- that's growth of 16% to 21% per annum during the next four years. 

Now, Pioneer believes it will be able to drive the majority of this growth from its Spraberry/Wolfcamp acreage. Pioneer has proved reserves totaling 432 million barrels of oil equivalent, or MMBOE, accessible via 640 potential drilling locations within this region.

In comparison, Pioneer's Eagle Ford acreage has proved reserves of 131 MMBOE.

However, what's really attractive about Pioneer is the fact that the company estimates that its Spraberry/Wolfcamp acreage could contain up to 9.6 billion barrels of recoverable resources with 20,500 drilling locations. With a current market capitalization of $29 billion, the market is placing a value of less than $3 per barrel on Pioneer's potential resources.

Speculation
Still, whether or not Pioneer will be able to recover these potential resources is another matter. Nevertheless, Pioneer's near-term growth plans show that investors have plenty to look forward to from the company during the next year or so.

Throughout 2014, Pioneer plans to increase Spraberry/Wolfcamp and Eagle Ford production by up to 27% and 29% respectively. In total, this production growth should mean that Pioneer is producing 192,000 barrels of oil equivalent per day by the end of 2014 in the best case -- 19% growth over 2013 production levels.

With production expected to double from 2013 levels by 2018 this implies that Pioneer's output will be in the region of 300,000 barrels of oil equivalent per day by 2018.

Current Wall Street estimates imply that this production growth will translate into average earnings per share of $6.51 for full-year 2015, which puts the company on a forward P/E of just under 31.

Unfortunately, as the company's shares are trading on such a high growth multiple, there's not much room for disappointment, and if Pioneer were to miss its self-imposed targets, the shares could suffer a sell-off.

A more diversified play
On the other hand, EOG is much more of a vertically integrated player than Pioneer. Indeed, EOG has production assets outside the U.S. as well as rail infrastructure and sand mines within the U.S., designed to lower the company's cost of doing business and increase margins. 

Similar to Pioneer, EOG is planning to expand crude production by 27% through 2014, although total production will only expand 12% year over year as much of EOG's existing hydrocarbon output is natural gas.

However, EOG's national rail infrastructure, including loading facilities within the Bakken, Permian, Eagle Ford, and Barnett regions, as well as unloading facilities in the Cushing and St. James depots mean that EOG is able to ship its crude around the country in order to achieve the best price.

For example, the St. James terminal is located on the Gulf Cost, giving EOG access to the Gulf Coast refiners, and here, crude can be sold at the Louisiana Light Sweet benchmark, which traded at a $5.81 per barrel premium to WTI throughout 2013.

This infrastructure, along with EOG's 40% year-over-year crude output growth during 2013 (9% total production growth) means that the company achieved a return on equity of 15.6% during 2013, similar to industry leader ConocoPhillips. 

Further, EOG is forecasting its return on equity to jump up to 18% for 2014, which would make it one of the most efficient independent exploration and production companies on the market.

Unfortunately, Pioneer made a loss during 2013, so it's not possible to compare EOG's performance to it.

Putting together a conclusion
So, it would appear both EOG and Pioneer have many similar qualities, although their valuations are extremely polarized. Specifically, EOG is trading at a forward P/E of 18.9 for 2014, which is a high multiple for the oil exploration and production sector, but considering the company's growth, this valuation is justified.

Meanwhile, Pioneer, as mentioned above, is trading at a P/E of over 30 for 2015, and despite the company's impressive growth targets, the shares look fully priced with little room for error. Additionally, EOG's current dividend payout of $0.52 per annum easily trumps that of Pioneer, which offers a token payout of $0.08 per year.

Foolish summary
So all in all, both Pioneer and EOG have attractive qualities, but in the end it comes down to valuation.

EOG's valuation and the company's planned growth over the next year mean that investors are taking on much less risk than a bet on Pioneer. Unfortunately, even though Pioneer has plenty of potential, it's not yet clear if this potential will be realized.