Lower Commodity Prices Will Reduce Pioneer’s Free Cash Gusher in 2023

We’re lowering our fair value estimate for Pioneer Natural Resources PXD to $181 per share from $205 after taking a second look at the firm’s fourth-quarter earnings and incorporating guidance for 2023. We have slightly moderated our growth projection for the firm and increased our operating cost assumptions, given that 2023 guidance was ahead of our prior estimates, but the recent slump in oil and natural gas prices was the primary driver and will weigh steeply on earnings and cash flows in the next couple of years. Very strong commodity prices in 2022 propelled free cash flows to around $9 billion, and the recent declines will reduce the cash generated by at least one third in 2023-24. There’s no change to our $55 midcycle forecast for WTI, so our longer-term estimates are unaffected, and our prior forecast for well cost inflation of about 10% year on year was consistent with updated company guidance (the budget was hiked by significantly more than 10%, but the firm is also increasing activity levels, with two extra rigs and 25 incremental completions).

In our first look at the firm’s fourth-quarter earnings, we highlighted much improved operating expenses (which were about $1.50 per barrel of oil equivalent lower sequentially in the fourth quarter). We commented that this offset the slightly disappointing production result, with output in the period in the lower half of the guidance range for both oil and total volumes. Guidance for the first quarter shows much of the sequential reduction unwinding, suggesting the benefit will be short-lived. Energy costs are a key component of the firm’s expenses, and natural gas in particular has declined further since the guidance was issued on Feb. 23, so we expect total production costs will only rebound to near the low end of guidance in the first quarter and remain flat for the rest of 2023. Nevertheless, our prior estimate was higher than the low end of guidance, so this still weighs on firmwide value in our model.