Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

In the high-octane exploration and production business, growth rules.

Still, it seems a tad harsh that Pioneer Natural Resources Co. knocking a mere percentage point off its output target for 2017 should have wiped 9 percent off its share price in after-hours trading as Tuesday evening segued into Wednesday morning.

Except it wasn't a mere percentage point.

Overall, it's true Pioneer cut its target for production growth in 2017 from 15-18 percent to 15-16 percent. That's a drop of just one point using the middle of those ranges and still within range. Moreover, Pioneer isn't the only company tapping the brakes on spending and growth amid sub-$50 oil. 

The bigger problem lay beneath that headline number.

Production delays and a rising cut of natural gas and natural-gas liquids in Pioneer's wells mean less crude oil than expected. And given that, even in its battered state, crude oil commands much higher prices than either of those other two fuels, that's a big problem.

At the start of the year, Pioneer laid out a plan to raise its crude-oil production to 62 percent of its overall output in 2017, up from 57 percent in 2016. Now the target is just 58 percent. That's still an increase, obviously.

But combine it with the tweak down in overall production and it's a big, 9 percentage-point cut -- taking oil output growth this year below the long-term plan Pioneer laid out to much fanfare in February:

Crude Calculation
Pioneer's new guidance implies a drop of nine percentage points in its projected growth of oil production in 2017 -- taking it below the company's long-term plan
Source: The company
Note: Original and revised guidance calculated using the mid-points of Pioneer's targets. Long-term guidance is "18%+".

Granted, 17 percent growth in oil production is still pretty racy and only just below the long-term plan.

But at 12.5 times Ebitda, Pioneer's stock trades toward the top of an already relatively rarefied group of Permian producers, so there's little room for error (it doesn't help that arch-rival EOG Resources Inc. turned in much better numbers.) The company will have a lot of explaining to do on Wednesday morning's call.

Increasing the oil cut has been crucial to the survival of many firms in the downturn, Pioneer included:

Gusher
The steady increase in the proportion of crude oil in Pioneer's output has been crucial to mitigating the impact of the crash on its cash flow
Source: The company
Note: "LTM" reflects the last 12 months through June 2017.

Even for E&P investors, growth has to be the right kind of growth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net