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An Undervalued Stock in an Overvalued Market

See what we like about Pioneer National Resources.

By Morningstar's estimate, the stock market is about fairly valued. Today, we’re taking a look at an undervalued stock from the energy sector that our analysts are excited about: Pioneer Natural Resources (PXD).

Historically, Pioneer had been one of the shale industry's weakest capital allocators, but we think the company is now a poster child for capital discipline: It intends to reinvest only 70%-80% of cash flows. The company will distribute much of the remainder to shareholders as a variable dividend that will keep payouts calibrated with the commodity cycle, thereby setting an example all peers should follow. We think its Midland Basin acreage contains enough top-tier drilling opportunities to support decades of high-margin drilling, and should ensure Pioneer remains among the shale industry's cost leaders for the foreseeable future. In addition, the firm has always maintained an exceptionally strong balance sheet, even during periods of challenging commodity prices--in fact, its leverage has not been above two turns since 2009.

We assign the stock a narrow economic moat rating, a stable moat trend, and exemplary marks for stewardship. We peg a fair value estimate of $151 on shares; the stock currently trades about 40% below that.

Morningstar Research Services sector strategist Stephen Ellis provided the research behind this video.