Yield Leader Pioneer’s Production Below Guidance Midpoint

Pioneer’s PXD fourth-quarter production was 662 thousand barrels of oil equivalent per day, or mboe/d, which was below the midpoint of guidance (oil volumes were 351 mboe/d, also in the lower half of the projected range). But it made up for slightly disappointing growth by shaving off over $1.50 per boe from its operating expenses. This excludes a further $0.85 per boe reduction in production taxes, as these are directly related to commodity prices and thus predictable. The sequential decline in natural gas prices was still the driver though, as energy costs are a key component of Pioneer’s operating expenses. The market did not fully anticipate the margin improvement, as the firm’s adjusted earnings were 3% higher than consensus, per FactSet.

For 2023, management has raised the capital budget to $4.6 billion-$4.95 billion (up 29% over 2022). The bulk of the increase probably reflects catch-up inflation for service providers as contracts roll off and Pioneer is forced to revise terms at current rates. At this stage in the reporting season, we’ve seen budget increases in the ballpark of 10%-30% from peers. However, Pioneer is also increasing activity this year, with two incremental rigs and an additional 25 well completions. Management expects that to drive production to 670-700 mboe/d (4% above the fourth-quarter run rate and 5% higher than the 2022 average). Pioneer can fund its operations and dividend with West Texas Intermediate crude near $50 per barrel, which means current forward prices imply another year of substantial free cash generation. The firm returned 95% of its free cash to shareholders in 2022, and its first-quarter payout implies an 11% yield. It has over $2 billion remaining on its repurchase authorization.

We intend to incorporate these results shortly, but after this first look, our fair value and narrow moat rating are unchanged.