Pioneer Earnings: Operational Improvements Support Higher Volumes and Lower Capital Expenditure

Pioneer PXD has started reaping the benefits of the new development strategy it launched in 2022, in response to declining well performance (see our Oct. 31 note). Essentially, last year management was mixing in drilling targets that were previously passed over, to make the most of its core Permian acreage, and that was weighing on the firm’s capital efficiency. It actually entered the play well before the shale revolution started, leaving it with a relatively large footprint, so it doesn’t need to be so parsimonious. The new strategy was to focus on its dry powder, with full-stack development of multiple reservoir targets in undrilled acreage units. This was expected to drive up well performance in 2023, and the latest update from the company shows very strong results so far (well productivity has rebounded from the 2022 trough, and the 2023 vintage is now projected to exceed the 2021 level too).

The firm has been exploring other ways to drive up capital efficiency, and these are also starting to bear fruit. The firm reports over 1,000 horizontal drilling locations in inventory that are suitable for 15,000-foot laterals, and it now expects an average IRR uptick of 35% (as compared with 10,000-foot laterals). It is also benefiting from previously announced initiatives to incorporate more simul-frac operations (batching fracking processes), dual-fuel or electric completion fleets, and locally sourced sand. As a result, management is confident it can deliver on its 2023 goals with one less rig and fewer wells, and is opting to reduce investment rather than outperforming more dramatically. Second-quarter production was 1% above the top end of guidance, full-year production guidance was raised 3%, and the 2023 budget was lowered by 3%. The market reacted positively to these data points, with shares up 2% on a tough day for oil prices and energy stocks. We intend to incorporate these results shortly, but for now our narrow moat and fair value estimate are unchanged.