Pioneer Natural Resources Permian

Source: Pioneer Natural Resources. Sands Weems, photographer.

It's a tough time to be an oil company these days, but Pioneer Natural Resources (NYSE:PXD) is still trying to make the best of it. The company did just that during the third quarter, delivering stronger-than-expected production growth, which fueled better-than-expected financial results. Further, given the strong drilling returns it's seeing even at the current oil price, it remains on pace to deliver strong production growth for the foreseeable future.

Drilling down into the numbers
Pioneer Natural Resources produced 211,000 barrels of oil equivalent per day, or BOE/d, during the quarter, 7% higher than the year-ago period. Further, production was above the high end of its own guidance range of 205,000 to 210,000 BOE/d. That production growth was driven by strong production growth within its Spraberry/Wolfcamp drilling program in the Permian Basin, with production up 13% over just the prior quarter.

In addition to stronger-than-expected production growth, the company delivered a solid reduction in its costs. Its drilling and completion costs are down 25% year over year while lease operating costs have fallen 18% from the year-ago period on a BOE basis.

Because of this combination of lower costs and better-than-expected production, Pioneer Natural Resources was able to deliver financial results that beat analysts' expectations. While the company reported an adjusted loss of $1 million or $0.01 per share, that was $0.02 better than the consensus estimate. Meanwhile, reported earnings were a lot higher at $646 million because of mark-to-market gains on its hedge portfolio as well as the closing of the sale of its Eagle Ford Shale midstream assets.

Pioneer's strong results really bode well for Permian peers Laredo Petroleum (NYSE:LPI) and Concho Resources (NYSE:CXO), which report later this week. Because of this investors should keep an eye to see if Concho Resources, which reports Wednesday morning, and Laredo Petroleum, which reports later that evening, can also deliver better than expected production and earnings. Both companies are expected to report a profit, with Laredo expected to deliver $0.06 per share and Concho Resources expected to earn $0.21 per share. However, both could beat those expectations by delivering stronger production than guidance while also taking full advantage of the downturn to drive costs lower.

A look ahead
Thanks to stronger production growth this quarter, Pioneer Natural Resources is updating its full-year growth forecast from 10%-plus production growth to 11%. Further, the company has reiterated its commitment to grow its production by a compound annual growth rate of 15%-plus over the 2016-through-2018 time frame. However, it now expects to do so operating fewer than the 28 rigs it had previously anticipated because of stronger well results and faster drilling time. This expected rig reduction should reduce the capital costs, which is great news for a company that's currently outspending its cash flow.

The primary reason Pioneer continues to push to deliver strong double-digit growth even though oil prices remain weak is due to its robust drilling returns, and the fact it has the cash after the aforementioned asset sale. However, instead of leaving that cash on its balance sheet, the company is reinvesting it in new wells, because at the currently projected strip price for oil and gas (which is the future price via the futures market), it can earn an internal rate of return between 45% to 60%, which is as good as, if not better than, drilling returns before the oil price plunge.

Investor takeaway
Pioneer Natural Resources produced a strong quarter, all things considered. While oil prices did weigh on its results, the company beat expectations after delivering above-guidance production growth while driving its costs lower. Now all eyes are on peers Concho Resources and Laredo Petroleum to do the same later this week.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.