Risk/Reward Rating: Positive
Pioneer Natural Resources is sitting on one of the highest quality oil and gas resource bases in the United States. The company owns over one million acres in the sweet spot for oil and gas in the Texas Permian Basin. Incredibly, Pioneer has the lowest breakeven oil price amongst its US peers at under $30 per barrel. This provides an unusual margin of safety and positions the company as the market leader for the foreseeable future in the US.
The superb resource base and top-notch economics provide for a powerful cash flow machine in the current environment of stable to rising energy prices. In fact, the company is forecasting free cash flow for 2021 of $2.7 billion on $5.9 billion of cash flow from operations. The current valuation does not reflect its pole position in the US energy sector and is a fraction of the market averages.
Valuation: 14x 2021 earnings estimates and 10x 2022 estimates. On a cash flow basis, the company is trading at 6x estimated 2021 cash flow from operations and 13x estimated free cash flow. Given the blue-chip status of Pioneer, these valuation multiples pale in comparison to the major US stock market averages at 23x to 32x estimated earnings.
It should be noted that Pioneer has a strong balance sheet with low debt levels which further supports the case for a premium valuation and enables dividend and production growth looking forward.
The oil and gas industry globally and in the US in particular is looking better than it has in some time. With global growth returning as the COVID pandemic ends, oil and gas demand should be robust in the coming years. In the US, the prospect of more regional supply chains and the onshoring of industrial and manufacturing activity is likely to create an ideal backdrop for energy demand.
While the shift to electric vehicles will limit oil demand growth long term, it will also limit investment growth in traditional energy markets setting up a healthy supply and demand balance. In past years, the US energy sector has been plagued by over investment creating volatile boom and bust cycles for prices. Going forward, with more stable prices likely, the industry will achieve more attractive returns than in past cycles.
With a balanced production mix of oil and gas, Pioneer is well positioned to capitalize on these trends. Additionally, the company is well positioned for the export markets along the gulf coast providing optionality to Pioneer to target the highest return global markets at any given time. All told, Pioneer stock offers a lower risk and an attractive return option in the energy sector.
Technical backdrop: The stock peaked in July of 2014 at $235 when the boom period in the US energy sector ended. Since then, Pioneer stock has been correcting and has built a strong long-term base. The COVID crash punctuated the final bottom which was successfully retested in November of 2020.
Pioneer Natural Resources 2-year daily chart
The resulting W bottom pattern in addition to the seven-year correction provides for a lower risk entry compared to much of the market as the stock price is not overextended to the upside. This is evidenced by the 200-week moving average at $141 (grey line on the 5-year weekly chart).
Pioneer Natural Resources 5-year weekly chart
Technical resistance: $180 area then little until the all-time high zone near $235.
Technical support: $150 to $155 area.
Price as of report date 7-2-21: $166
Pioneer Natural Resources Investor Relations Website: Pioneer Natural Resources Investor Relations