In the opening rounds of the current Oil Crisis, David Einhorn famously criticized Pioneer Energy (PXD) calling it the Mother-Fracker at the Sohn Investment Conference. Einhorn cited a calculation that Pioneer had lost $12 a barrel for every barrel the firm developed over the last year. Einhorn then went on to compare that performance to using $50 bills to counterfeit $20 bills. Pioneer’s shares fell 2 percent that day. Then the market had a change of heart.
The share price of Pioneer has nearly recovered since that point despite oil falling from $63 a barrel to $26 a barrel. Pioneer’s stock has outperformed its comparable universe of peers by more than 50 percent during that period. Pioneer’s stock has risen by an average of 34 percent annually in the last 7 calendar years since the end of the Great Recession. In 2016 alone, the company’s shares are up by 29 percent.
All of this begs two important questions which are critical to how oil investors should view the world; (1) What did Einhorn miss?; and (2) why is Pioneer performing so much better than other oil companies? The answer in both cases would seem to be related to the acreage Pioneer sits on.
While Pioneer has a long history in the oil business and once drilled both vertical and horizontal wells in many parts of the country, all of that has changed drastically in the last few years. In the fall of 2011, Pioneer geologists did studies showing that the Permian basin was tremendously prolific for horizontal wells. After drilling a few test wells on sites Pioneer owned, the firm has since poured all of its energy and money into the Permian. That appears to have been a smart decision. Related: Solar To See Twice As Much Investment As Fossil Fuels By 2040
Pioneer has consistently beaten production estimates and it appears the firm has tremendous reserves. It reported a 30 percent fall in well drilling costs to investors in March while simultaneously raising production results by roughly 50 percent. 2016 targets by the firm have increased with no measurable increase in spending. Those kinds of results are what has helped to buoy the stock.
Pioneer has an enormous Permian presence including rights to 800,000 acres and 20,000 drill sites that could hold around 10 billion barrels of crude. For every $1 increase the firm can garner in its margin then, the~ $25B market cap company should see potentially up to 40 percent in market gains.
The broader point here for investors is that Pioneer doesn’t have to be particularly profitable at current oil price levels – they just need to be more profitable and efficient than the competition. With Permian prices among the lowest in the U.S., Pioneer would appear to have the potential to outlast many competitors and wait for oil prices to continue their rebound. Given the stock price performance, that appears to be the conclusion investors are drawing at least. Related: Why Has There Been So Little M&A Activity During The Oil Crisis
Investors have little appetite for new oil investments in many cases these days. And that is both understandable and perhaps even wise from a diversification standpoint. Yet even investors unwilling to commit new funds to the energy sector could benefit from prudent reallocations. When oil prices are high, all companies in the space generally look good. It’s only when prices fall and the proverbial tide goes out that investors find out which firms are swimming naked. Investors should bear that maxim in mind, and consider due diligence on outperformers like PXD and a select few comparably positioned firms.
By Michael McDonald of Oilprice.com
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