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Pioneer Natural Resources Delivers Another Permian Gusher in Q1

Matthew DiLallo, The Motley Fool

Pioneer Natural Resources (NYSE: PXD) delivered another outstanding quarter as its Permian Basin operations continue to produce excellent results. The oil and gas driller once again exceeded expectations as both production and earnings came in ahead of estimates during the first quarter. That kept the company on track with its full-year forecast to deliver double-digit production growth along with a gusher of free cash flow that it's increasingly sending back to shareholders.

Drilling down into the results

Metric

Q1 2019

Guidance or Expectations

Difference at the Midpoint

Permian production

320,000 BOE/D

302,000-317,000 BOE/D

10,500 BOE/D

Adjusted earnings per share

$1.83

$1.63

$0.20 per share

Data source: Pioneer Natural Resources.

Pioneer Natural Resources' production out of the Permian came in above the top end of its guidance range -- surging 22.8% from the year-ago period -- due to continued strong drilling results. The company completed 71 new wells during the quarter, which were more productive than those it finished in the year-ago period. That's due to many factors, including the company's initiatives to use data from machine learning to optimize how it completes wells to improve their productivity.

High-margin oil output in the region averaged about 203,000 barrels per day. That was up 19.3% year over year and at the top end of the company's guidance range. That healthy growth in high-margin oil production, when combined with the company's ability to keep a lid on costs, enabled Pioneer Natural Resources to deliver expectation-beating profits during the quarter.

Oil pumps with the sun setting in the background.

Image source: Getty Images.

A look at what's ahead

Pioneer Natural Resources reached a key milestone during the first quarter as it sold its Eagle Ford shale assets for up to $475 million. So, the company is now a pure play on the fast-growing Permian Basin.

In addition to focusing all its efforts on one region, the company also continues to take steps to concentrate on one activity: drilling and completing horizontal wells. That led Pioneer Natural Resources to close its sand mine and sell its oil-field services assets. The company is now looking to sell its 27% stake in natural gas processing infrastructure operated by Targa Resources (NYSE: TRGP). The driller has been working with Targa Resources to build gas processing assets to support its growth in the region. However, it's now seeking to monetize its stake in the business to offload the investment requirements. While Targa would be a logical buyer for these assets, Pioneer could also sell them to another midstream-focused entity. Furthermore, the company is also evaluating the sale of its water infrastructure, which includes a wastewater treatment plant that should start up in early 2021.

Pioneer's strong showing during the first quarter keeps it on track with its full-year guidance. It still expects to spend between $3.1 billion and $3.4 billion on drilling more wells and continuing the buildout of its gas processing and water infrastructure. It can fully fund that investment level with cash flow, which is on track to come in at $3.75 billion.

The company intends on returning its growing supply of free cash flow to shareholders. It has already repurchased $328 million in stock as part of its $2 billion program. Now, the company plans on increasing its dividend. It's aiming to pay a 1%-yielding dividend, which implies raising the current payout level from $0.32 per share each year up to a range of $1.50 to $1.75 per share.

As part of its strategy to return more cash to shareholders, Pioneer Natural Resources plans to modify its long-term game plan in the Permian. It aims to align capital spending to accelerate its ability to generate free cash flow while also supporting a mid-teens long-term production growth profile. It also intends to explore ways to maximize the value of some of its undrilled acreage by either selling it or bringing on drilling partners to finance wells on that land.

Turning oil into cash

Pioneer Natural Resources has joined many of its oil-producing peers in shifting its strategy. The company is no longer striving to expand production as fast as possible. Instead, it's aiming to increase cash flow so that it can return more money to its investors. This approach has the potential to enrich its investors in the coming years.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Targa Resources. The Motley Fool has a disclosure policy.