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.

Pioneer Natural Resources Co. is staying the course -- a slightly adjusted course, that is.

It's been a roller-coaster of a year for the U.S. shale-oil bellwether. In February, it unveiled a moonshot goal of quadrupling its oil and gas production to 1 million barrels of oil equivalent per day within a decade. Pioneer's stock jumped 14 percent over the following week. Six months later, it cut its guidance for production this year and spooked the entire sector with signs of rising natural-gas output from its tight-oil wells. The stock dropped by a fifth in the following week.

Thrills And Spills
Pioneer led the pack early this year but gave it all back in August
Source: Bloomberg
Note: Performance indexed to 100.

So with third-quarter results, released Wednesday evening, a little boredom was in order. On that front, Pioneer delivered. Earnings actually came in well ahead of expectations. But after that slip in the second quarter, investors were focused on output -- and given that this had been pre-announced, there wasn't much chance of a surprise there.

The bigger news concerned that longer-term production target.

On Wednesday, Anadarko Petroleum Corp. sent a pretty strong signal that its own growth plan -- to double oil production by 2021 -- might come out lower from a recalibrated budgeting process prioritizing shareholder returns. The original plan was predicated on a $55-a-barrel oil price. Now, Anadarko aims to cover its spending from cash flow at $50 oil in 2018.

Pioneer, however, is sticking with that 1 million-barrel-a-day target for 2026 -- just with a few tweaks.

First, higher-value oil is expected to make up about 70 percent of that target rather than the earlier, and also fuzzy, objective of more than 70 percent. This appears to be tied to the slippage in this year's guidance, from 62 percent to 58 percent.

More importantly, Pioneer is actually moving in a different direction from Anadarko on cash flow and spending. Pioneer had expected to cover spending from cash flow in 2018 and generate excess cash thereafter, assuming an oil price of $55. Now, it estimates the breakeven price for 2018 is more like $57 or $58 a barrel. So the new target is to be cash-flow neutral at $50 -- but in 2020.

It's a tricky maneuver Pioneer is attempting here. Maintaining the promise of the moonshot but with a temporary diversion through low-Earth orbit in the near term can be met with jeers (look at Tesla Inc.'s sell-off on Thursday after delaying Model 3 production targets -- again).

As I wrote back in February, though, whether or not Pioneer gets to a million barrels per day by 2026 is largely beside the point. Adjusting that target significantly on Thursday would have been an unnecessary, and self-inflicted, wound.

The critical issue in this changed environment is that cash-flow guidance. On the face of it, Pioneer's stock should have been punished by investors largely baying for cash rather than growth. But it's only down about 2 percent as of writing this, on a day the sector's off by 1 percent.

Investors might be cutting Pioneer some slack for several reasons. It offered to codify some returns-focused objectives in its executive compensation plan -- another bugbear that's risen to prominence in the sector this year -- and indicated it wouldn't take higher oil prices as a signal to accelerate spending. Pioneer also has a relatively pristine balance sheet and has hedged more than 80 percent of next year's oil production. Importantly, it didn't cut the near-term outlook on growth, which is much more tangible than anything in the 2020s.

Above all, in valuation terms, the stock remains in the doghouse relative to its closest peer, EOG Resources Inc.

From Pioneer To Runner-Up
Pioneer's double-digit percentage discount to EOG hasn't narrowed
Source: Bloomberg

That Pioneer can zig slightly while many others are zagging suggests the value-over-growth mantra isn't completely gospel in the E&P sector. Even so, if Pioneer is to close that gap with its arch-rival, it can't afford to change direction again in the coming year.

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