Pioneer Natural Resources Is Heavily Undervalued

Pioneer Natural Resources (NYSE:PXD) is a large hydrocarbon and shale driller with an almost $50 billion market capitalization. The company has an impressive portfolio of assets and dividend yield. We expect it'll be able to generate substantial shareholder returns from its unique portfolio of assets. Additionally, a potential acquisition by Exxon Mobil (XOM) could drive strong returns.

Pioneer Natural Resources 2022 Overview

Pioneer Natural Resources had an incredibly strong 2022, supported by strong oil prices and a strong portfolio of assets.

The company had an incredibly strong 2022, supported by high oil prices. The company was the most active driller and largest oil producer in the state of Texas with finding and development costs incredibly low at <$10 / barrel and a 152% reserve replacement ratio. The company has continued to improve its efficiency versus 2021.

The company returned $8 billion to shareholders with a 13% dividend yield and a net 16% shareholder return. The company repurchased $1.65 billion in share repurchases, which helps to reduce its dividend expenses. With low debt, the company is one of the few crude oil companies that doesn't need to worry about paying off debt versus shareholder returns.

Pioneer Natural Resources Execution Strength

Pioneer Natural Resources has continued to execute with its high-grade portfolio of impressive assets.

The company had incredibly strong execution through 2022. Its FCF for the year came in at 17% and its net debt to EBITA is effectively negligible for the company which has just a few billion in debt and just over $100 million in annualized interest expenses. That also positions the company much better than its peers in a rising interest rate environment.

From its production, higher oil prices, helped the company to generate FCF of $34 / barrel. The company's 2022 corporate breakeven of $39 / barrel means it needs ~$75 / barrel to generate a 10% FCF yield post-tax. That means in a higher priced environment, the company can generate even higher returns, and much stronger dividends especially.

Pioneer Natural Resources 2023 Guidance

Pioneer Natural Resources' 2023 guidance shows its ability to continue driving strong shareholder returns.

The company's 2023 guidance highlights the strength of its portfolio. The company expects 685 thousand barrels / day in production with $4.6 billion in capital spending. That represents a relatively low capital budget of $18.4 / barrel that will help keep the company's breakeven low. The company expects >$4 billion in FCF, or an 8% FCF yield.

That is effectively the bare minimum of what we call long-term a good investment. That highlights how despite having a strong portfolio of assets, its relatively higher valuation could hurt shareholder returns.

The company's corporate breakeven with maintenance capital is $39 / barrel. The company's base dividend is included at $47 / barrel, and is a base 2% that it can easily afford. The company expects that in 1Q 2023 it'll be providing closer to a 10% annualized dividend given its base + variable dividend policy. After $47 / barrel the company will invest in growth and returns.

Pioneer Natural Resources Exxon Mobil

Rumors are that Exxon Mobil is looking into acquiring Pioneer Natural Resources and we think it's a brilliant decision.

The company has strong cash flow generation at a variety of prices. At $60 WTI it has a 6% FCF yield, with 5% annual dividends. At $80 / barrel WTI that becomes a 12% yield with 10% dividends. Looking at the top side at $140 / barrel, peaks that are only reached with a major supply decrease such as the Russia-Ukraine war, its cash flow is much stronger.

The company in that scenario would earn $14 billion in FCF, a 28% FCF yield, with annualized dividends at a staggering 22%. The company could build a strong net cash position, with continued share buybacks, with its leftover cash. Exxon Mobil is working to build a massive Permian Basin business of almost 1 million barrels / day with a breakeven competitive with Middle Eastern oil.

Acquiring Pioneer Natural Resources, especially if the company can utilize stock as its share price reaches all-time highs, could be massively profitable. Even a cash acquisition could be profitable though, if the company pays 5% for debt, the breakeven on an acquisition would be at roughly $55 / barrel WTI. That could be profitable.

More importantly, an acquisition by Exxon Mobil could place a strong price floor for the company for those who invest.

Our View

Pioneer Natural Resources is more expensive than many other smaller shale companies. However, with almost no debt and a breakeven of less than $40 / barrel, the company is one of the strongest companies in the industry, especially in the case of an industry downturn. The company has a base dividend of 2% and a strong variable dividend.

At the same time, the company has continued to opportunistically repurchase shares. An acquisition by Exxon Mobil could represent a strong price floor and enable overall stronger returns. A great company at a fair price is a good deal and that's what Pioneer Natural Resources represents. We recommend investing with a small starter position.

Thesis Risk

Pioneer Natural Resources' value is based on crude oil prices, with current WTI prices at >$80 / barrel. The company's threshold for a double-digit return on its market capitalization is roughly $75 / barrel WTI, which is almost 10% below current prices. However, below that and the company is overvalued and at risk of performing.

In a volatile commodity market with the risk of a hard landing from inflation, the company is susceptible.

Conclusion

Pioneer Natural Resources has one of the strongest portfolio of assets in the shale region. It's turned that into a stringent and efficient portfolio of operations. The company has worked to replace reserves (150% 2022 reserve replacement ratio), keep costs low ($39 2023 breakeven), and maintain a strong balance sheet.

Especially with rumors of an acquisition by Exxon Mobil, we view the company as a strong investment candidate. The company can generate double-digit shareholder returns on its enterprise value at a breakeven of $75 WTI, below current prices. While prices in the crude oil markets remain volatile, Exxon Mobil represents a floor, and overall the company is a strong investment.

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