Pioneer Natural Resources Eagleford

Source: Pioneer Natural Resources. Sands Weems, photographer. 

One thing that the downturn in oil prices is making quite clear is the fact that not all oil companies are suffering from this price weakness. This is clearly the case at Pioneer Natural Resources (NYSE:PXD), which is actually doing quite well. That's due to a combination of factors, which CEO Scott Sheffield detailed on the company's third-quarter conference call.

1. We had a strong quarter
In leading off his prepared remarks, Sheffield pointed out:

[Pioneer] had a tremendous quarter in regard to production growth. Third quarter production [was] 211,000 barrels of oil equivalent per day, 52% oil. It was 7% above the second quarter and above the top end of guidance of 205,000 to 210,000 [BOE per day] for that quarter. Obviously, driven by the strong Spraberry/Wolfcamp horizontal drilling program.

Sheffield notes that the key factor fueling its strong production was its Spraberry/Wolfcamp drilling program in the Permian Basin. The company is earning a fantastic internal rate of returns between 45% to 60% at the current forward oil price, which is enabling it to really drive economic growth even in the current environment. In other words, location is a key factor driving its success.

The Permian is really the place to be these days with peer Concho Resources (NYSE:CXO) enjoying 34% year-over-year production growth thanks to its strong position in the Permian. That strong production enabled Concho Resources to raise its full-year production growth guidance from 24%-26% to 27%-28%, joining Pioneer in increasing its guidance for growth.

2. We're doing more with less
Sheffield then detailed a second factor fueling its success by noting:

What's probably more important is the fact that this growth is coming from only six rigs in the north and a net 2.4 rigs in the south, so really only 8 1/2 rigs coming out of the Permian Basin.

Pioneer is driving strong growth despite using fewer rigs now than it was at this time last year. The reason it is still driving strong results is because it is becoming much more efficient in drilling wells having substantially reduced the number of days it takes to drill a well.

3. We have a strong balance sheet
The third factor that's fueling Pioneer Natural Resources through the downturn is its "strong balance sheet," which Sheffield noted included $600 million of cash. That cash pile was boosted by the recent closing of the first half of the sale of its midstream business. Further, the company is carrying just $2.1 billion in debt, which is a minimal amount, especially compared to its peers.

4. We have one of the strongest hedge positions in the industry
Sheffield noted one more really important factor driving its strong results when he pointed out:

We probably had the strongest hedging position when you look at the years 2015 and 2016 of anybody in the U.S. We were hedged 90% for 2015, 85% for 2016 on oil and 20% for 2017.

Pioneer's hedges have enabled the company to capture $20.47 per barrel more than the market price last quarter. That's almost a third more cash flow per barrel, which has really been instrumental in enabling the company to maintain its strong balance sheet. Hedge gains also bolstered Concho Resources last quarter after it too realized nearly $20 per barrel more than the market price.

5. We're getting ready to ramp up oil-fueled growth
Thanks to these four factors Pioneer Natural Resources is gearing up to accelerate its production growth over the next three years, "targeting 15%-plus production growth over the next three-year time period, 2016 to 2018," according to Sheffield. That's coming at a time when a lot of its peers are scaling back, with many, including Concho Resources, just expected to keep production roughly flat next year due to persistently weak oil prices. Pioneer, on the other hand, is targeting growth because it doesn't expect oil prices to stay weak for the next three years so it is taking advantage of its strong position to start to ramp up production in anticipation of higher prices.

That being said, the company did recently pause its plan to add more drilling rigs largely due to continued efficiency gains, though continued price weakness and elevated supplies likely played a big factor in the decision.

Investor takeaway
Four factors are driving Pioneer Natural Resources' downturn success:

  • It has a premier location in a top oil basin.
  • Its costs are falling like a rock while it is also becoming more efficient enabling the company to do more with less.
  • It has a cash-rich and debt-light balance sheet.
  • It has one of the strongest hedge books in its peer group.

Because of these factors the company is now in the position to accelerate its growth at a time when most of its peers are stomping on the brakes.

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.