Pioneer Earnings: CEO Transition and Return-of-Capital Tweak Distract From Robust Operations

Pioneer Natural Resources PXD handed in a solid report card for the first quarter, with better-than-expected production complemented by operating costs that were below the bottom end of the guidance range (albeit mostly due to lower commodity prices). As a result, the firm’s financial results were ahead of FactSet consensus estimates. Pioneer remains on track to hit its 2023 objectives, with no change to the annual budget or growth plan (full-year volume guidance was left 670-700 mboe/d). We intend to incorporate these results shortly, but after this first look, our narrow moat rating and fair value estimate are unchanged.

Even though the update was ostensibly favorable, shares slumped 5% on the first trading day after it was released (on a positive day for oil and upstream stocks). Investors had two surprises to contend with. First, CEO Scott Sheffield will retire at the end of the year. While this may have contributed to the selloff, we think the company has a reasonable succession plan, elevating its COO Richard Dealy, a 30-year company veteran, into the top spot.

The other significant change was a tweak to the firm’s return-of-capital plan. While it still intends to return 75% of its free cash to shareholders, management has given itself the option to allocate the remainder after the fixed dividend to buybacks rather than the variable dividend. Prior to this change, the aim was to return 75% of free cash directly, meaning buybacks were additional and necessarily funded with the remaining 25% of free cash flows. We think that’s likely to increase value destruction as management has a rosier view of its valuation than we do (it bought back $500 million of stock in the first quarter at $206 per share, above our $181 fair value). As the firm will generate more free cash when oil prices are strong the risk is that it will disproportionately buy back stock at the wrong time in the cycle.