PXD is the Pure Midland Basin Operator with incredible dividends

Pioneer is an incredible company in the Oil and Gas sector. So far I have written reports on OXY and XOM. PXD is the dividend play.  Pioneer has made a masterclass move recently. In the last quarter they not only beat expectations but they were able to realign the company to the Midland Basin only producer by seliing Contenental their properties/leasehold in the Delaware Basin (which PXD's CEO Scott Sheffield has stated is inferior to the Midland Basin.) They sold these properties for way more than the tangible value at $3.2 Billion (which were aquired from Parsley aquisition which they in turn aquired them from Jagged Peak.) Pioneer has turned their acreage in the Midland Basin into production mode. Which means they have optimized thier wells design, completion, production and maintenance. This will allow them flexibility on both their required base dividend and their new variable dividend. The proceeds from the sale are going to both debt reduction and share repurchases (1.1 Billion to share repurchase). Currently at the STRIP pricing on Oil and Gas (and NGL's) Pioneer can pay the dividend (base), pay down debt, maintain capex with flat production, and return up to 10+% in variable dividend by next quarter. I expect they will announce extremely large EPS numbers over the next year. Turning to their acreage position in the Midland basin they have more than 10 years of inventory at the current drill rate (however what really matters since drilling is so quick is the completion timing). Their property is contiguous from the Double Eagle acquisition and has (from shallowest depth to deepest depth roughly) the Middle Spraberry, Jo Mill Sands, Lower Spraberry Shale, Dean Sands, Wolfcamp A, Wolfcamp B, Wolfcamp D. (Some spots have the Lower Wolfcamp B also known as the Wolfcamp C by some.) These benches are all profitable at the current price environment. Interestingly Pioneer has been drilling the properties to maximize their properties with higher MCF and NGL count. (Essentially drilling the less profitable properties and saving some of their more profitable acreage for later.) This sets them up nicely for future value in terms of drilling potential and future recoverable assets. Now that we have determined that PXD has future value at STRIP pricing, future inventory to keep the drilling flat, low debt, share repurchases, and optimized production across their properties we can look at the share price target. If we expect 2022 demand globally to outpace supply and use the strip pricing of $75 for end of 2021 (Q4) and $68 for 2022 and $4.36 HH for 2022. We can run a couple models and average their prices to get a range. The way that I like to look at production companies (with variable div.) is through their production guidance. Pioneer expects to make about 614,000 BOE/D. Holding that flat we can expect about $7.0 billion FCF for next year which is 1.75B per quarter post costs that can be 50% used for the dividend. That makes the 10% yield possible. (if not more however I expect inflation to play a role in well costs next year as they have to ramp up production to keep the total production flat.) Pioneer has 244.13M share outstanding. That would mean at 50% divdend based on FCF of $14.34 per share. Assuming their WACC is about 9.52% and the perpetual div growth we come to about $220.66 per share. This would reflect that PXD is undervalued by about 21.20% alongside with the dividends that you would take over the course of the next year. If inflation appears uncontrollably then all bets are off and we might see this number increase.

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PXD is the Pure Midland Basin Operator with incredible dividends

bullish

Pioneer is an incredible company in the Oil and Gas sector. So far I have written reports on OXY and XOM. PXD is the dividend play. 

Pioneer has made a masterclass move recently. In the last quarter they not only beat expectations but they were able to realign the company to the Midland Basin only producer by seliing Contenental their properties/leasehold in the Delaware Basin (which PXD's CEO Scott Sheffield has stated is inferior to the Midland Basin.) They sold these properties for way more than the tangible value at $3.2 Billion (which were aquired from Parsley aquisition which they in turn aquired them from Jagged Peak.)

Pioneer has turned their acreage in the Midland Basin into production mode. Which means they have optimized thier wells design, completion, production and maintenance. This will allow them flexibility on both their required base dividend and their new variable dividend. The proceeds from the sale are going to both debt reduction and share repurchases (1.1 Billion to share repurchase).

 

Currently at the STRIP pricing on Oil and Gas (and NGL's) Pioneer can pay the dividend (base), pay down debt, maintain capex with flat production, and return up to 10+% in variable dividend by next quarter. I expect they will announce extremely large EPS numbers over the next year. Turning to their acreage position in the Midland basin they have more than 10 years of inventory at the current drill rate (however what really matters since drilling is so quick is the completion timing). Their property is contiguous from the Double Eagle acquisition and has (from shallowest depth to deepest depth roughly) the Middle Spraberry, Jo Mill Sands, Lower Spraberry Shale, Dean Sands, Wolfcamp A, Wolfcamp B, Wolfcamp D. (Some spots have the Lower Wolfcamp B also known as the Wolfcamp C by some.) These benches are all profitable at the current price environment. Interestingly Pioneer has been drilling the properties to maximize their properties with higher MCF and NGL count. (Essentially drilling the less profitable properties and saving some of their more profitable acreage for later.) This sets them up nicely for future value in terms of drilling potential and future recoverable assets.

Now that we have determined that PXD has future value at STRIP pricing, future inventory to keep the drilling flat, low debt, share repurchases, and optimized production across their properties we can look at the share price target.

If we expect 2022 demand globally to outpace supply and use the strip pricing of $75 for end of 2021 (Q4) and $68 for 2022 and $4.36 HH for 2022. We can run a couple models and average their prices to get a range. The way that I like to look at production companies (with variable div.) is through their production guidance. Pioneer expects to make about 614,000 BOE/D. Holding that flat we can expect about $7.0 billion FCF for next year which is 1.75B per quarter post costs that can be 50% used for the dividend. That makes the 10% yield possible. (if not more however I expect inflation to play a role in well costs next year as they have to ramp up production to keep the total production flat.) Pioneer has 244.13M share outstanding. That would mean at 50% divdend based on FCF of $14.34 per share. Assuming their WACC is about 9.52% and the perpetual div growth we come to about $220.66 per share.

This would reflect that PXD is undervalued by about 21.20% alongside with the dividends that you would take over the course of the next year. If inflation appears uncontrollably then all bets are off and we might see this number increase.

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read-time
3 min

220.66

Target Price

8/ 10

Confidence

6-12 Months

Timeframe
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Earnings Release
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