Image source: Pioneer Natural Resources, Sands Weems. 

The steep drop in the oil price over the past year has had varying degrees of impact on oil producers. For some, the impact has dealt a devastating blow by weakening their ability to survive. For others, while the impact stung, it has only made them stronger. That second class of oil companies describes Pioneer Natural Resources (NYSE:PXD), because it has grown stronger throughout the downturn and, as a result, should deliver strong growth in the years ahead, though that growth does come with one very big catch. 

Full speed ahead
Like it was for most oil companies, 2015 has been a transition year for Pioneer Natural Resources. The company dramatically cut its spending, evidenced by the fact that its initial capex budget was 45% lower than 2014. It also focused on reducing its costs, driving a 25% decrease in its drilling and completion costs as well as a 17% reduction in its lease operating expenses per barrel of oil equivalent. Finally, it sold its non-core Eagle Ford Shale midstream business to bolster its cash position by more than $1 billion.

All of these initiatives positioned the company to return to growth mode after basically tapping the brakes on growth in 2015. The cost savings in particular have been really key because the company can now drill more wells for the same amount of money. Just as importantly, it's drilling returns at the current oil price average between 45% to 60% in its three key drilling regions. Thanks to this combination, Pioneer Natural Resources expects to drive strong double-digit production growth over the next three years, even if oil prices remain in the current sub-$50 a barrel range.

Source: Pioneer Natural Resources Investor Presentation. 

That's a really robust projected growth rate, especially given the fact that few of its peers are willing to forecast that far ahead because of oil price volatility. For example, fellow Permian Basin focused driller Concho Resources (NYSE:CXO) has yet to set targets beyond 2015. This is despite the fact that Concho Resources' 2015 growth rate is currently much more robust at 24% to 26% over last year's rate, which is a lot higher than Pioneer's 10% growth rate.

A reason for pause
Having said all of that, there is an important distinction to note about Pioneer's future growth: It's not fully funded by cash flow at a $50 oil price. At that price, the company expects to experience a more than $500 million shortfall between its expected operating cash flow of $1.5 billion and capital spending of $2.2 billion. That gap will tighten over time as its production grows and becomes oiler, and therefore higher margin, both of which boost its cash flow. The fact remains that this is not yet a sustainable growth rate at the combination of the current oil price and Pioneer's drilling costs. 

In fact, the main reason Pioneer is accelerating its growth rate over the next few years is because it is using the proceeds from its recent Eagle Ford Shale midstream asset sale to bridge the gap. That's quite a different path from the one Concho Resources is taking, which is to match capex with cash flow next year, even if that results in a significant deceleration of its growth rate. However, this is a move Concho believes is more prudent given the fact that there is no reason to grow quite as fast at the current oil price, which is low because of too much supply on the market. Pioneer's view, on the other hand, is that it's growth is warranted because it is making strong returns, and it has the cash to invest. So, Pioneer believes it makes sense to accelerate its growth rate even though oil prices remain muted.

Investor takeaway
Pioneer Natural Resources expects to deliver robust production growth of 15% each year through 2018, even if oil prices don't budge. While that sounds really compelling, the fact of the matter is that the growth isn't yet sustainable beyond that year because it is being partially funded by the cash proceeds from an asset sale. It's a playbook the industry has used before, and one that didn't quite work out because it left producers short on cash when oil prices crashed. Instead, Concho Resources is taking the more prudent course of action by matching its drilling program with cash flow, even if its growth rate will be much lower, because it yields a much more sustainable company over the long term.