Pioneer Natural Resources Permian

Source: Pioneer Natural Resources

Oil prices are sliding, but that didn't stop Permian Basin focused driller Pioneer Natural Resources (NYSE:PXD) from delivering strong third-quarter results after the closing bell Tuesday. Fueling the quarter was strong production growth that led the company to solidly beat analysts' estimates. On top of that, the company announced its intentions for its Eagle Ford Shale assets. There's a lot to cover, so let's dig in.

Drilling down into the numbers
Pioneer Natural Resources reported net income of $374 million, or $2.58 per share. However, on an adjusted basis, the company's net income was $195 million, or $1.35 per share, which is $0.09 above what Wall Street was expecting to see.

The strong showing was the result of the company's strong third-quarter production of 186,000 barrels of oil equivalent per day, or BOE/d. That's up 6% from last quarter and was driven by the company's successful horizontal drilling program in the Spraberry/Wolfcamp. The company also narrowed its 2014 production growth forecast from a range of 15%-19% to a range of 18%-19%. Further, it sees production growth from its current operations in a range of 16%-21% per year through 2016.

Eagle Ford Shale update
Pioneer Natural Resources also announced that it's planning to sell its midstream assets in the Eagle Ford Shale. The company owns a 50.1% stake in the business, which was formed in 2010 and has helped to support the upstream development of the Eagle Ford Shale. However, the company did note that it doesn't plan to sell its upstream assets, which had been rumored to have been put up for sale. Instead, the company plans to hold on to these assets and continue to develop the oil-rich shale play.

A look at the outlook
As I already noted, Pioneer Natural Resources is planning a minimum of 16% production growth per year over the next two years, despite the weakness in oil prices -- in part because the company has protected a large portion of its cash flow with hedges. In fact, more than 85% of its oil production this year and next year is hedged, while 45% of oil production is hedged in 2016. That's a very strong hedge book, well above most of its peers, and it will provide the company with the cash it needs to drill new wells. Further, the company can still earn a very strong return on that cash by drilling new wells even with lower oil prices. Currently, the company sees returns ranging from 40% to 80% in a $70-to-$80 oil price environment.

The company also isn't forsaking investments that are geared to reduce its costs in the future. That's why it's still constructing a fieldwide system for water transport that will cost up to $1 billion over the next four to five years. However, that project should reduce the cost of each future well by about $500,000. On top of that, the company is spending money to build its field infrastructure as well as to expand its frac sand mine. These investments will enable the company to meet its growth goals while also keeping its costs low so that it can still earn a strong return even with lower oil prices.

Investor takeaway
Pioneer Natural Resources surprised the analysts by delivering a stronger-than-expected quarter. The company's position in the Permian Basin continues to deliver meaningful growth in production along with solid profitability. That's not expected to end, as the company expects that its focus on keeping its costs low will earn it strong returns even if oil prices stay weaker.

Matt DiLallo and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.