It has been a rough couple of months for oil companies like Pioneer Natural Resources (NYSE:PXD). That was evident by the company's recent earnings report as lower oil prices resulted in weaker earnings. The turn in oil is now forcing the company to change its plans as it adjusts to this new reality. The company's management elaborated on the current oil market as well as the changes it's making to its business plan on its recent quarterly conference call. Here are the five most important things management said on that call.
Still makin' money
Despite weak oil prices Pioneer Natural Resources is still making money drilling new oil wells. In fact, because its costs have come down about 10% so far, its returns are actually improving even though oil prices aren't. CEO Scott Sheffield noted this by saying that, "We're delivering great returns, both in Eagle Ford, up to 70%, and both in the south and the north in our Spraberry/Wolfcamp areas, up to 55%." These strong drilling returns are driving the company's ability to grow production next year even though the price of oil is weak.
Cutting back... for now
However, despite those strong returns, Pioneer Natural Resources still needs to cut back. This is why it announced that it was cutting its rig count in half and reducing its capital spending plan by 45% in response to lower oil prices. The company simply isn't yet comfortable with spending more than its cash flow when it believes it can get better returns in the future should the oil price improve or oil-field service costs come down some more. So, while its official budget for the year calls for a 50% reduction in rigs it is leaving the door open to add rigs later in the year. Sheffield thinks that either costs will go down further, or the oil price will improve so that it would make sense to add rigs later in the year. He noted this by saying,
By delaying ... we could see an improvement of additional 30% to 40% as we add additional rigs -- whether it is beginning July 1, of 2015, or whether it is by the end of the year -- by getting additional 10% cost reduction. Seeing oil prices restore back to at least $70 a barrel in 2016. We'll see a 30% to 40% increase in returns over and above what I just mentioned today.
Pioneer is purposefully growing slower than it could in order to accelerate its drilling either later this year or early next year when it can earn an even higher return. That flexibility should create more value for investors than if the company simply continued to drill now just to keep drilling.
Optimistic about a second half rally in oil prices
While the price of oil is depressed right now, that's entirely due to an oversupply of oil in the market as demand hasn't been as robust as expected. However, that oversupply could be worked off sooner than anyone expects because of the potential for oil production in the U.S. to decline because of how rapidly production drops from shale wells.
U.S. oil producers have rapidly cut drilling rigs. Sheffield sees this leading to a retreat in U.S. oil production later this year, which is bullish for the price of oil. He said that,
Based on how fast this has happened [rig counts dropping], I do expect total US production to flatten second half of 2015 and start declining. That's why I'm optimistic about oil prices coming back in 2016.
As of the end of last week the U.S. rig count was down 342 from its peak and at the lowest level since December of 2011. This caught the eye of OPEC, which cut its production growth forecast by a third as it sees the oil glut slowly starting to ease. This suggests that the price of oil could pick up. This would be welcomed news as a higher oil price is needed in order to encourage companies like Pioneer to add more drilling rigs in order to keep oil production from dropping too far and creating a shortage.
Strength during storm and ready to pounce when it ends
Pioneer Natural Resources is prepared to patiently wait out the storm in the oil market. It has a very strong balance sheet, which is a rarity among energy companies, so that it can just sit back and wait until oil market conditions improve. Sheffield detailed the company's prime position by saying that,
We have some of the best source rocks in the US, or in the world. We probably have one of the best balance sheets. So Pioneer is probably well-positioned as well as anybody to weather this storm, whether it is 12 months, 24 months, 6 months. We're ready to ramp up activity when things improve.
Because of its position of strength the company can simply wait things out and then accelerate its activity when market conditions improve.
OPEC is making shale drilling cheaper
One more interesting comment that the company made, this time by COO Time Dove, was that the OPEC shift from protecting oil prices to protecting its market share could have unintended consequences down the road by making shale drilling cheaper. Dove noted that,
In the basins where we are, our breakeven economics are some of the lowest in the industry, but for the industry, this is probably an unintended consequence of OPEC's pricing policies, that they are forcing us to further reduce our breakeven economics. And we'll be the beneficiary of that, as an industry, as we move forward.
What he's saying is that by allowing the price of oil to deflate OPEC also is deflating some of the industry's costs, such as for oil-field services. Because of this, shale drilling, which has been getting cheaper every year, is now going to see that trend accelerate so that it will be a lot more profitable at lower oil prices. That's good news for the industry over the longer term as it can make more money even at a lower long-term oil price.
While the downturn in the oil market has put Pioneer Natural Resources' ambitious growth plans on hold, it hasn't stopped the company from still making decent money. In fact, the company sees the current issues in the market as a long-term opportunity to get costs lower so that it can improve its returns. That's why it's holding back for now and planning to accelerate its growth when it can make more money doing so.